• BoE to keep rates steady at 5.25% and stick to existing guidance
• Avoid rate cut signals as no press conference or new projections scheduled

No rate cut surprises expected; UK economy is still resilient

The Bank of England (BoE) will review its monetary policy during the last meeting of the year on Thursday after the Fed and the ECB have their say. Investors are certain that interest rates will remain steady for another month, but they will probably not get any clear signals about whether rate cuts are on the cards next year.

Investors are pricing in a total of around 85 bps of monetary easing by the end of 2024 in rising expectations the global economy could suffer a blow in the aftermath of an extraordinary monetary tightening. In the UK, GDP growth has been sluggish throughout the year compared to the 2021-2022 booming period, remaining downbeat below 1.0% y/y.

Yet the economy has been more resilient than analysts anticipated, narrowly avoiding a recession while achieving substantial progress on the inflation front. The headline CPI plunged to a two-year low of 4.6% y/y in October from 6.7% y/y previously led by housing and household services, boosting hopes of soft landing. While this adds credence to the existing monetary tightening policy and makes additional rate increases unnecessary, the job is far from done for rate cuts to kick in.

Watch out for wage-price inflation spiral 

The UK’s inflation rate is still more than double the BoE’s 2.0% target and higher than the one in the US and the eurozone. Perhaps higher mortgage rates could further limit buyers’ affordability in the coming months but with wages rising by 7.2% y/y and faster than consumer prices despite falling from July’s record high of 8.9% y/y, consumption could keep inflation above the target. Wage pressures might also induce businesses to transfer costs to consumers or delay any price cuts.

Will the hawkish camp stay united?

Note that there is no press conference and new economic projections on the agenda. So, traders might pay extra attention to the voting structure to get a better view of the central bank’s thinking.

Expectations are for two hawkish central bankers to vote for a rate hike compared to three in November. Jonathan Haskel and the deputy governor Dave Ramsden could represent this minority, with Catherine Mann likely changing camp to join holders, though their latest comments urged the need for higher rates for longer and provided no direction for more tightening. Therefore, a voting structure of 9-0 cannot be excluded.

EUR/GBP could be a key pair to watch

As regards the market reaction, the British pound could retreat if the team of rate hike supporters narrows or dissolves. However, the absence of any rate cut signals could also prevent any serious declines in the currency. Recall that the BoE expects inflation to cool to 3.1% by the end of 2024, higher than previously expected, and slip to 1.9% by the end of 2025.

EUR/GBP could be interesting to watch if the BoE preserves some hawkishness, and the ECB confirms the end of the rate hike cycle. In this case, the pair could give up its weekly gains to test the important 0.8565 support zone. A steeper decline below 0.8535 could bring the 2023 floor of 0.8500 under examination.

Alternatively, if the BoE rate statement convinces traders that the tightening era is over, the pair could move towards its simple moving averages (SMAs) seen within the 0.8640-0.8670 zone.