Bank of England rate hike pause back on the table after inflation surprise

LONDON — The Bank of England’s next monetary policy move is now wide open, following a significant downside surprise in the August inflation print out earlier on Wednesday.

Prior to the August consumer price index reading, the market was pricing in an 80% chance that the central bank would hike interest rates by 25 basis points on Thursday to 5.5% — the highest level since December 2007.

Market pricing swung drastically after the annual headline CPI print fell to 6.7% in August from the 6.8% of July, defying a consensus forecast that it would rise to 7%.

Shortly after 10 a.m. London time, the probability that the Bank will hold rates steady at 5.25% had risen from 20% to almost 55%, according to LSEG swaps data.

Notably, core CPI — which excludes volatile food, energy, alcohol and tobacco prices — came in at 6.2% in the 12 months to the end of August, down from 6.9% in July. The goods rate rose slightly from 6.1% to 6.3%, but was more than offset by the services rate slowing significantly from 7.4% to 6.8%.

Following the surprise, Goldman Sachs changed its projection for Thursday’s critical rate decision and now expects the Bank of England to keep its main bank rate unchanged.

“With today’s data, two out of the three indicators that the MPC has set out to monitor inflation persistence have now shown notably more progress than anticipated since the August meeting,” Chief European Economist Jari Stehn and his team said in a note Wednesday.

“Combined with their recent dovish commentary, we now expect the MPC to keep Bank Rate unchanged tomorrow and lower our forecast for the terminal policy rate to 5.25% (from 5.5% before).”

Barclays analysts said in a research note on Wednesday that the broad-based downside surprise, especially relative to the Bank’s August projections of a 7.1% headline inflation print…