British Pound: BoE tightening seen over-priced – BBH

Brown Brothers Harriman’s Elias Haddad expects UK September Consumer Price Index (CPI) and August labour data to be pivotal for Bank of England (BoE) pricing, with markets already discounting a 25 bps hike to 4.00% in November and 100 bps over twelve months. Haddad argues the BoE may not need to tighten as much, citing spare capacity, near-neutral rates, and likely fiscal tightening, which weighs on the British Pound (GBP).

UK inflation and wages in focus

"UK September CPI (Wednesday). Headline CPI is expected at 3.4% y/y (BoE projection: 3.0%) vs. 3.1% in August, core CPI is seen at 2.8% y/y vs. 2.6% in August, and services CPI is projected at 3.6% (BoE projection: 3.6%) vs. 3.4% in August."

"Ahead of that, the UK August labor market data is due Tuesday. The policy-relevant private sector regular pay growth is seen at 3.0% y/y vs. 2.9% in July, matching the BoE’s Q3 forecast and supporting Governor Andrew Bailey’s comments last week that there is little evidence yet of inflation becoming embedded in wage-setting."

"The swaps curve price in 90% odds of a 25bps hike to 4.00% on November 5 and 100bps of tightening in the next twelve months. In our view, the BoE may not need to tighten as much as markets anticipate, which is a drag on GBP. The UK economy is operating below capacity, the policy rate is near the top of the BoE’s estimated 2% to 4% neutral range, and fiscal policy will likely turn more restrictive following the October 28 UK budget."

(This article was created with the help of an Artificial Intelligence tool and reviewed by an editor. Know more.)