Key takeaways

• The Bank of England is expected to raise interest rates to 4%.
• Falling oil prices can lead the BOE to signal fewer future rate hikes.
• A dovish policy outlook can trigger moderate losses for GBP/USD.

BOE checklist The BOE meeting is coming up at noon. A rate hike to 4% is expected, but it’s what they signal about the future direction for interest rates that really matters for financial markets. Below we take a look at the main things to watch ahead of today’s decision.

• UK and European stock indices are hitting record highs on Thursday, as Europe gets a boost from the rotation out of the AI trade.
• A rate hike is fully priced in, but traders have pared back expectations for further rate hikes as the oil price falls below $100 per barrel.
• The vote split will be interesting, in September it was 6-3 to hold rates, who will switch and are they likely to maintain a hawkish stance for the long term? That will determine the price action after the meeting.
• The MPC’s economic forecasts are crucial for traders: in September, the Bank expected CPI to rise to 3.75% in Q4, up from 3.2% in July, and to peak at 4%, due to rising energy prices.
• We think that the bank will want to caveat their CPI forecasts saying that energy prices remain volatile, for example, the price of Brent is lower by 15% this week.
• GDP was revised higher for Q3 at the last meeting, with the BOE expecting growth to expand by 0.4% last quarter.
• The risk is that growth forecasts are cut for next year. We continue to expect that the BOE sees inflation peaking at 4%. The oil price has retreated in recent weeks, and this will feed directly into the BOE’s forecasting model, since energy prices are driving UK inflation.
• The BOE could also signal that the passthrough effects from rising energy prices remain moderate so far. The BOE’s own survey data sees pay growth rising to 3.5% next year, and the BOE’s newest inflation gauge, the sticky-central inflation measure, was 3.3% in September, which suggests that broad-based UK price pressures are not building at a rapid rate, even though they remain above the BOE’s 2% target.
• Due to this, the BOE’s message later today may be restrained and on balance the MPC may want to get the message across that a series of rate hikes may not be necessary to blunt the impact of the latest surge in energy prices.
• So, even if the BOE hikes rates today, the message might be on the dovish side, especially if the 2027 growth outlook is revised lower. Further rate hikes may be limited, and the market could push out expectations to Q2, to give themselves breathing space.
• This may weigh on the pound, GBP/USD has risen by 2% in the past month. It is above key moving averages, which suggests a bullish bias. However, a rate hike along with a dovish outlook from the BOE today could trigger some moderate losses for cable. $1.3330 is the 50-day sma, and we expect this to hold as strong support.

Chart 1: GBP/USD

Source: XTB