BoE: Lots of uncertainty looming – Nomura

The Bank of England expects UK CPI inflation to remain unchanged at 2.6% to then climb to 2.8% by September and given high inflation previously was not enough to convince the Bank of England to hike, any disappointment in the release should further reduce the already low market pricing of a future Bank of England hike and any upward surprise will likely be met with “it won’t hike either way”, according to analysts at Nomura.

Key Quotes

“BoE Governor Carney said at the press conference last week that the sole cause of inflation being above target in recent quarters has been the fall in sterling following the Brexit vote. This suggests wages need to rise before we start to see a hawkish shift from the BoE.”

“It will be wages that capture the larger market move. The BoE lowered its wage forecasts and therefore lowered the bar for an upward wage inflation surprise in quarters to come. But it’s too soon for that surprise next week. The headline measure the market follows is a year-on-year rate on a three-month moving average. It is therefore slow to respond to a good run of wage data (such as we’ve seen over the past three months) and is also performing a year-on-year percent rate compared with a period of large and rare 1% month-on-month wage rises. So next week, even if we were to see a strong 0.4% on the month rise in headline wages, the headline year-on-year percent measure would fail to rise given its construction. “Declining real wages” should rule the narrative once again and, as a result, we’d be comfortable holding short GBP risk over the event.”