MNI STATE OF PLAY: BOE Eyes Dovish Rate Hike

The Bank of England could choose its November meeting to carry out a rate hike it has signalled is coming soon as inflation spikes, but it is also likely to try to dampen market expectations of the pace and magnitude of tightening likely next year when it makes its announcement on Thursday.

While it is possible an expected 15-basis-point hike will wait until December, the difference between acting now or later will be minimal if next month's increase is clearly signalled in the minutes and by Governor Andrew Bailey.

But the Bank's updated forecasts could push back against large-scale repricing of market expectations, which now indicate a very high probability of four hikes by mid-2022, with Bank Rate rising from its current 0.1% to 1.25% by the end of next year. Monetary Policy Report forecasts could show inflation undershooting target two and three years ahead on market rate curves, while overshooting on constant rates, justifying more tightening but not to the extent priced-in.

A split vote for a hike, or arguments from some MPC members expressing reservations about tightening, could also help bring the whole rate curve lower.

Since the Monetary Policy Committee left policy unchanged in September, Chief Economist Huw Pill has acknowledged that inflation could hit 5%. Research, cited by Monetary Policy Committee member Catherine Mann among others, also shows that firms and households become more aware of inflation when it ceases to be stable, so headline-grabbing prints risk fuelling expectations of further price rises.

LABOUR MARKET STOCK TAKE

But Pill was quoted as being careful not to endorse any tightening beyond 0.75%. MPC member Silvana Tenreyro said in a speech that she considered the committee's current guidance, that "some modest tightening of monetary policy over the forecast period was likely to be necessary," still to be valid.

Official fiscal forecaster the Office for Budget Responsibility published updated forecasts Thursday showing a 4.4% peak in the target inflation measure, CPI, but added that developments "since we closed our forecast would be consistent with inflation peaking at close to 5% next year."

The MPC will also publish a labour market "stock take" in the November MPR, shining a light on exceptionally high vacancies alongside restricted labour supply even following the conclusion of the government's furlough income-support scheme at the end of September. While 3 million workers had already moved from furlough back to employment by Sept. 30, another 1.3 million were still signed up to the scheme, with vacancies running at over 1 million.

In the MPR, MPC members and Bank economists will offer a view as to the extent that skill or geographical mismatches will leave some of the last furloughed cohort jobless. A shrinking workforce with companies struggling to fill jobs could prompt the central bank to worry about the danger of wage inflation, former BOE Deputy Governor and top OBR official Charles Bean told lawmakers Monday.