MNI BOE WATCH: MPC To Hike, But Path Forward Unclear

The Bank of England is widely expected to hike rates to 4% in the first policy move since December 2025 on Thursday, but its guidance is likely to remain ambiguous as to whether more hikes are coming, given the absence of second-round inflation effects so far from higher energy prices.

Bank rate has been held at 3.75% since the outbreak of the Middle East conflict in what the Bank has described as an "active hold," and the most recent September vote was split six-three for unchanged rates. 

However, the continuation of the Iran war means that Governor Andrew Bailey, and Deputy Governors Sarah Breeden, Clare Lombardelli, and Dave Ramsden are all expected to flip and vote for a hike, given their comments since the last meeting. (See MNI POLICY: BOE's Focus On Energy Supply As It Swings To Hikes)

But, with the MPC still split over the force of the inflationary impulse, guidance is likely to remain close to its language since March, which has indicated that "the committee stands ready to act as necessary.” The MPC could indicate that future policy developments will be data-dependent, though without any signal to endorse market pricing, which implies three subsequent hikes.

The Bank's July Monetary Policy Report included a box investigating the discrepancy between the rate path implied by market pricing and analysts' expectations, suggesting that some of the tightening implied by the OIS swap curve is caused by risk premia.

SECOND ROUND EFFECTS

Members have discussed the potential for second-round inflation effects through wages, but it seems the majority are not willing to wait before acting.

"If we were to wait for the sort of the picture of second round effects to fully emerge ... It's most likely we would have waited too long," Bailey said at an OMFIF event in October. (See MNI POLICY: Lack Of 2nd-Round Effects Weighs On BOE Hawkishnes)

External MPC Members Catherine Mann and Megan Greene, alongside Chief Economist Huw Pill, are expected to vote for a hike again. Greene has said the risks of waiting to act outweigh the damage done by hiking too aggressively in her individual paragraph.

Even assuming subdued second-round effects, the BOE’s new forecasts are still likely to show inflation heading over 4%.

The UK has seen above-target inflation for much of the past five years, with September CPI rising by 3.5%. Nonetheless, the official fiscal watchdog, the Office for Budget Responsibility, estimated in its forecasts alongside the Oct 28 budget that there will be no real wage growth in 2027. 

"These second-round effects will be less inflationary than those following the previous energy price spike in 2022, as a significantly looser labour market restricts workers’ capacity to bargain for higher wages," it said in its Economic and Fiscal Outlook.

OBR Budget Responsibility Committee member David Miles told MNI that the large number of very small policy changes at the budget should not affect the BOE's decisions. (See MNI INTERVIEW: Budget Broadly Neutral For BOE- OBR's Miles)

MNI POLICY: Lack Of 2nd-Round Effects Weighs On BOE Hawkishnes

The Bank of England’s guidance is likely to remain non-committal towards future tightening after a widely-anticipated rate hike later this week, with the centre of gravity on a divided Monetary Policy Committee not yet persuaded that higher energy prices are generating second-round effects, MNI understands.

Given the splits on the MPC, something similar to its collective guidance since March, that "the committee stands ready to act as necessary”, is likely to be repeated on Thursday. This could take the form of a suggestion that future policy developments will be data-dependent, though without any signal to endorse market pricing which implies three subsequent hikes.

So far, many MPC members consider that second-round effects has been the proverbial dog that didn’t bark. November’s Monetary Policy Report could well reprise its July language on the labour market, noting that so far there have been "few signs of second-round effects" and that these effects "will probably be moderate." 

Governor Andrew Bailey referred to second-round effects in remarks at the IMF meeting in Bangkok last month, saying that "to the extent we've seen evidence, so far it's been quite subdued." Deputy Governor Dave Ramsden has also said he is sanguine about labour market developments.

However, even assuming subdued second-round effects, the new MPC forecasts are still likely to show inflation heading over 4%. While job vacancies have trended down, unemployment is tracking lower than the BOE assumed, which may suggest less slack than thought.

NOVEMBER MPR NOT DEFINITIVE

The Bank of England is continuing to try to more fully understand labour market developments, and its February Monetary Policy Report will be more comprehensive, incorporating a supply-side stock take and completion of research on recent data showing gains in productivity. (See MNI POLICY: BOE Explores Patchy UK Productivity Gains From AI)

MPC members have also faced a challenge to make sense of the impact of disruptions to complex oil supply chains. While November's central projection will still be conditioned on crude oil and gas futures curves as proxy measures for the energy shock, MPC members and Bank staff have spent time exploring the oddities of the market rate OIS curve, including the wedge between analysts' lower modal path for Bank Rate and the higher mean OIS pricing.

MPC member Catherine Mann, for one, has openly questioned whether curves showing oil prices falling back to pre-crisis levels are believable. At a Treasury Select Committee hearing, Bailey and Ramsden cited maintenance, the wedge between crude and refined products prices, diesel, and jet fuel prices as elements to watch.

But, while side models can capture some of these various energy effects, the Bank is unlikely to publish any alternative measures of the energy shock. (See MNI INTERVIEW: Central Banks Underplay Oil Risk- Baumeister)

MNI NORGES WATCH: Hold Expected With Focus On Guidance

The Norges Bank is widely expected to leave its policy rate at 4.5% on Thursday, with the market looking for clues as to whether it will hike in December.

Market pricing reflects the consensus for a hold by Norway’s central bank, with only 2.8 basis points of tightening implied from this week's decision, however a hike in December or early 2027 is implied to be very possible.

In September, the Bank hiked by 25 basis points and the Monetary Policy and Financial Stability Committee said that "it will likely be necessary to keep the policy rate elevated for a time, and the Committee is prepared to raise the policy rate further if needed." 

The CPI-ATE core inflation measure was 0.1 percentage points higher than the Bank's forecasts in September, at 3.0% year on year, while CPI rose to 3.4%. At its September meeting, the Bank said that, while underlying inflation had moderated somewhat, "the inflation outlook somewhat further ahead does not appear to have changed materially."

Inflation has been above target for several years, as the Norges Bank noted at the last meeting, and the uncertain geopolitical outlook skews risk to the upside.

The energy price shock has already led the Fed, ECB and Bank of Japan to raise rates, with the Bank of England widely expected to follow this week. (See MNI RIKSBANK WATCH: Soft Inflation Unlikely To Delay Hike)

At its previous meeting, the committee "discussed to what extent the increase in market rates abroad could imply a higher long-term neutral interest rate in Norway," its summary said.

The krone has appreciated over recent weeks, which could provide a headwind to inflation, but this is unlikely to play a large role in the upcoming decision.

MNI RIKSBANK WATCH: Soft Inflation Unlikely To Delay Hike

The Riksbank is widely expected to hike its policy rate at the November meeting, with Governor Erik Thedeen and Deputy Governor Anna Seim clearly tilting towards tightening and their colleagues unlikely to unite to block them.

The five-member Riksbank Executive Board was already leaning towards hiking the policy rate, which is only at 1.75%, at its September meeting, and while market pricing for an increase eased somewhat after September’s soft inflation numbers these look unlikely to be sufficient to derail the announcement of a 25-basis-point increase on Wednesday.

In an Oct 8 speech, Thedeen said he thought "it might be reasonable to raise the interest rate already in November" while Seim also said in the September meeting minutes that unless something turned up to overturn her view of the economy it could be reasonable to hike in November.

Even one of the most dovish of the committee members, Per Jansson, has been open to tightening, stating that upside inflation risks "justified a somewhat faster normalisation of the policy rate" than the Swedish central bank had previously forecast.

SOFT INFLATION

Soft inflation is the wildcard weighing against tightening. Unlike in other advanced economies inflation in Sweden has been running below the target level despite the Iran war shock.

As Seim noted, headline inflation has been "artificially low because of the direct effects of the temporary fiscal measures," including the halving of VAT on food and a cut in fuel tax.

Headline inflation was 1.1% on the year in September. Even excluding these effects, it was still subdued, at 1.6%, compared to the Riksbank's 1.8% prediction. The krona has also strengthened, although this may in part reflect the likelihood of policy tightening.

The belief that the resilience of economic activity coupled with supply shocks linked to the Middle East conflict will continue to exert upward pressure on underlying inflation is, however, likely to be enough to justify tightening and an eventual return to a level around the neutral rate.

With no new quarterly forecasts in November, the focus will be on the guidance and there is a high chance that the committee will signal that the September rate path, which showed the policy rate moving up to around the mid-point of the neutral range of 1.5% to 3.0%, remains little changed.

MNI RBA WATCH: Bullock Points To Dual Mandate Following Hike

Reserve Bank of Australia Governor Michele Bullock stressed the importance of the Bank’s dual mandate following the Board’s six-three split decision to raise the cash rate by 25 basis points to 4.85%, noting the labour market remained an important consideration while risks to the central economic outlook were now more balanced.

The Bank's underlying cash rate assumption had shown one more hike prior to this decision, she said. (See MNI RBA WATCH: Board Likely To Hike Following Hawkish Signals) "Now, it may be that that doesn't work out to be enough, but I think there was a feeling that if you look at the forecasts, it wasn't as obvious as it was in some of the previous meetings where we had three big, skewed upwards risks on inflation,” she explained, adding risks to economic activity were now broadly balanced.

The revised assessment did not rule out further increases in interest rates, but the Board was preserving its options rather than signalling a particular course of action, she said.

SPLIT DECISION

The Board’s split decision and revisions to its accompanying statement, which removed a previous reference to the Board being "willing to increase the cash rate further if necessary," prompted markets to scale back expectations of further tightening.  

The Australian dollar weakened about 0.4% against the U.S. dollar despite the hike, while overnight indexed swap markets priced in little chance of a December increase and only a 25% probability of a February hike, down from about 35% before the meeting.

“The board's dual mandate is still in play here. We are not looking to tip the economy into recession if we can avoid it,” Bullock said, reiterating the Board's desire to preserve employment gains while bringing inflation back under control. 

“But we do need to get inflation down, and we do have excess demand at the moment. Our central forecasts do not see us going into recession, but it does see growth slowing quite markedly.”

In its updated Statement on Monetary Policy, the Bank forecast unemployment would rise to 5.1% by December 2028, 30bp higher than its August projection, alongside a higher NAIRU estimate. (See chart) It also increased its trimmed-mean inflation forecast to 2.9% by December 2027, 30bp above its August forecast.

Bullock said slower income growth, weak productivity and the supply shock had left households poorer, making subdued consumption feel like a recession even if the economy continued to grow. "And this is a manifestation of a lack of productivity growth, and the fact that we've had this massive supply shock imposed upon us.”

The hike was the Bank’s fifth this year and took the cash rate to its highest level since November 2008.

SUPPLY SHOCK

Bullock said the effects of higher oil prices and tighter capacity would keep inflation elevated over the coming year, adding that the Bank needed to ensure monetary policy was sufficiently restrictive to bring inflation down once those pressures eased.

Higher inflation over 2027 was "baked in", she explained, pointing to domestic pressure and oil prices. "It starts to come down after that, but really to the point about what we can do? We can't do much about the next year, so that's why it's really important that we make sure that we're in a position that when those baked-through inflation pulses have happened, that we've got enough restriction in the economy that it will put downward pressure on inflation from there.”

Bullock said the Bank wanted to prevent higher inflation becoming entrenched in expectations, with businesses passing on higher costs and households increasingly accepting inflation of 3-3.5% as normal, echoing Deputy Governor Andrew Hauser's earlier comments regarding the Bank's "nightmare scenario."

MNI INTERVIEW: Manufacturing Solid But War Sours Sentiment-ISM

U.S. manufacturing activity picked up in October but growth is being held back by policy uncertainty and continued Middle East tensions that is also souring sentiment, Institute for Supply Management manufacturing chair Susan Spence told MNI Monday. 

Spence said she remains convinced the Iran war is preventing a more significant expansion in factory output. The "floodgates would open" if the Middle East issues were resolved, she said. 

The ISM manufacturing index rose 1ppt in October to 55.5, above market expectations and marking the tenth consecutive expansionary reading. The details suggest there is momentum behind the upswing with all five subcomponents in expansion territory. October's rise was primarily driven by the production subcomponent, which registered its highest reading since November 2021. 

"The general sentiment is is a lot worse," Spence said. "What if the war was really over? Can you imagine? You could have a blow-the-doors-off economy. The underlying strength is still there, despite that, which just makes me think it could be so, so much better."

Industries are benefiting from the AI buildout and higher defense spending, with the report showing an uptick in production across machinery, computer and electronics, and equipment manufacturers.

The decline in the employment index also caught eye of the ISM manufacturing chair. However, hiring sentiment improved in October with 1.8 positive comments for each negative comment, a little better than last month's survey, she said. 

The mix of the ISM report's comments was 34% positive and 66% negative, down from a 40-60 ratio in September. Pricing volatility was the top concern of the negative comments. 

PRICE PRESSURES

Spence said the month's report is infused with concerns about the outlook for prices. "That impacts sentiment even if the report is good," she said.

The data point to continued price pressures for manufacturers, though the prices index eased 2.7ppts to 75.2. There were 20 commodities reported up in price versus two reported down in price, and 8 commodities reported in short supply, highlighted by metals and tech-related items.

Responses to the survey continue to suggest price increases in steel and aluminum, tariffs, and increases in petroleum-based products are the main factors behind higher input costs. Combined with still-elevated supplier delivery times, cost pressures for manufactures will be sticky, she said. 

'"We've got years of pricing increases. It's scary to be now closer to 80 than 50" on the prices index, Spence said, adding that she is not relieved by October's drop in the price index. (See: MNI INTERVIEW: Fed To Hike Twice More, Hold A While-Weinberg) 

ENERGY JITTERS

Higher oil prices are keeping input costs under pressure. Combined with slowing supplier deliveries, manufacturers will continue to face price pressures in the near term, Spence said. She added that orders feel like they are being held to a minimum, perhaps due to uncertainty.

"I just I feel like if prices don't settle down it's eventually going to manifest in ways that won't be pretty," she said. "But but we are in an expansion. That's not nothing."

The Trump administration has recently sent signals it could ramp up the conflict in the Middle East after the midterms elections. Spence said she will be keeping an eye on the ISM semiannual forecast that will come out in December to see how manufacturers see pricing developments. 

If the Iran conflict escalates, Spence expects firms will pass along price increases. "They're gonna pass stuff along, right?" she said, noting that the last forecast in May saw firms largely dismiss the war's impacts on prices. This time, "I think we're going to see something very different."

MNI INTERVIEW: Fed To Hike Twice More, Hold A While-Weinberg

The Federal Reserve will likely raise interest rates twice more in coming months and then keep them there for some time to ensure that inflation resumes its descent toward the central bank’s 2% goal, former Richmond Fed research director John Weinberg told MNI. 

"I would say probably a couple more might do it,” he said in an interview. “I think you want rates to be clearly restrictive, and I'm not sure we're there yet.”

Weinberg said it was acceptable for the Fed to hold rates steady last week, particularly given the looming midterm elections, but that it does create some risks given an inflation rate that has been above target for five and a half years. 

“If in the past the committee wanted to sit on its hands right before an election, that doesn't matter so much. But that relies on there being pretty solid locked-in public beliefs about what the medium-term path looks like,” he said. “If there's reasons for wondering about that, then that adds a little bit of risk. I think you could say that that's kind of the situation we're in now.” (See MNI INTERVIEW: Lockhart Sees Next Fed Hikes In Dec, Q1)

WOBBLY ANCHOR

He worries inflation expectations are not as firmly anchored as Fed officials claim, given the sheer persistence of lingering price pressures. 

“I fear that the prolonged period of elevated inflation could itself be adding some persistence through near-term and medium-term expectation effects. That could be happening even if we don’t see major movements in measures of long-term expectations,” said Weinberg.

“That would be telling us that the market expects the Fed eventually to do enough so that over the long-term inflation is going to come back to 2%, but if you don’t do it then you might lose that confidence.”

He said second-round effects from higher energy costs are possible even if oil prices don’t move higher from current levels around USD100 a barrel. The right level of policy restrictiveness becomes even harder to gauge because the neutral rate of interest could be climbing in real time, said Weinberg. 

“It’s made all the trickier by what’s going on with the term structure and term premia. If those are pointing to a general increase in uncertainty all the way across the curve, then certainly that doesn’t make R-star lower, if anything it makes it higher.”

“That’s one of the pitfalls of this language that people slip into sometimes by saying that markets are doing the Fed’s work for it because long rates are going up,” he added. “That’s about long rates and policy is about the short end. If there are things in the environment pushing up rates and you’re seeing that in the long end but the central bank is leaning against that in the short end, that’s working at cross purposes I think.”

HIGHER FOR LONGER

Weinberg said how long rates will need to stay elevated before the Fed can consider a reversal will depend on the path of growth, and on AI investment in particular. But if the current pace of expansion continues, there will be little room for easing on the horizon, he said. 

“If the economy sort of continues on the path that it's been on more or less, I don't think you'd want to be in a rush to take away the rate hikes that you put in. If you put it in to bring down inflation, you want to see inflation come down,” he said. 

Still, there is a scenario where the Fed might need to come to the rescue of a popping AI bubble. 

“Suppose this moderation in tech stock frenzy continues or deepens a little bit, and that feeds through to a slowdown in capital investment, capital expenditures in that sector. Then that could cause the economy to slow, perhaps to the extent of having a mild recession. If that happens, then the Fed is likely to want to respond to that if, if you've got real softening, if you've got real evidence of real softening. But if inflation hasn't really started moving down yet, then you might be you might be stuck with higher inflation."