Takeaway

The presenter expects the Bank of England (BoE) to hold interest rates this week, despite UK inflation rising to 3.1% in August. The key focus for markets is the expected slowdown in the pace of quantitative tightening (QT), which could support gilt prices, and the divergence in policy between the BoE and other central banks, which could pressure sterling.

What the presenter said

• The Bank of England is expected to keep interest rates on hold this week. (00:07)
• UK inflation rose to 3.1% year-on-year in August, up from 2.9% in July and the highest level since March. (00:18)
• The presenter notes that service sector inflation and core inflation remained unchanged at 3.4% and 2.6% respectively. (00:33)
• A weakening UK labor market is helping to contain price pressures. (00:44)
• While the market prices a low probability of a Fed hike this week, it is fully pricing in a BoE rate hike for the November meeting. (01:32)
• The BoE's vote is expected to be 6-3 in favour of holding rates, with Huw Pill, Megan Green, and Catherine Mann dissenting for a hike. (01:45)
• The presenter states that Governor Bailey wants to see clear signs of higher energy prices feeding into wages or broad price increases before hiking, which has not happened yet. (02:04)
• The BoE is expected to slow the pace at which it sells government bonds (gilts) from its balance sheet. (02:23)
• In the presenter's view, less supply of gilts should support prices and bring yields lower, which could be seen as reassuring for the market and supportive for the pound. (02:34)
• The presenter suggests it might be worth watching gilt yields more closely than Sterling around this decision. (03:37)

Trade ideas

None stated. The presenter did not put forward an actionable trade idea, instead focusing on the view that the BoE will hold rates but slow its quantitative tightening, making gilt yields the key market to watch.

Levels and data cited

• UK Inflation (CPI): 3.1% YoY (August), up from 2.9% (July)
• UK Service Sector Inflation: 3.4% YoY (August)
• UK Core Inflation: 2.6% YoY (August)
• Probability of Fed rate hike (this week): 30% (market pricing)
• Probability of BoE rate hike (November): "Fully priced in" (market pricing)
• Expected BoE MPC vote for a hike: 3 members

Risks and what would invalidate this

• The presenter mentioned further upside risks to inflation from rising food prices, linked to a UK drought and Super El Nino.
• The pound could come under pressure due to policy divergences between the Bank of England and the more hawkish Federal Reserve and ECB.