UK MPC pausing, not finished, Citigroup report

Citigroup economists doubt that the MPC’s decision to leave rates on hold at the August Inflation Report meeting signals that the tightening cycle is ended. Rather, we expect that, having just hiked in July, the MPC will wait a month or two before hiking again.

“We expect that the Inflation Report will project that some further tightening is likely to be needed, but probably not quite as much as markets price in – while also highlighting the relatively high level of uncertainties in the outlook, especially over inflation prospects,” note Citigroup analysts. Those inflation uncertainties imply that the outlook for interest rates also is quite uncertain, and the MPC will want to avoid any impression that the tightening cycle is finished until clear signs emerge that a marked economic slowdown is underway or imminent.

“Our base case remains for one more hike, to 6.0%, in the next few months, followed by a long period of rate stability. But if upside inflation risks continue to materialise while growth remains resilient, then rates may need to go above 6%,” note Citigroup analysts in a report issued August 3.