BOE set to raise rates again

Bank of England to raise interest rates again amidst stubborn double-digit inflation

By Ahmed Azzam | @3zzamous | 3 July 2023

  • US treasuries extend gains, Asian shares mixed, brent Up, gold Steady

  • US treasuries extend gains, Asian shares mixed, brent Up, gold Steady

  • BOE likely to raise interest rates for 12th straight time, follow Fed's pause signal

  • US producer prices to rise 0.3% MoM in April, YOY reading slows to 2.5%, weekly Jobless Claims May Rise to 245,000

What’s happened?

US Treasuries extended gains following an unexpected easing of US inflation in April, while the dollar held steady. Meanwhile, Asian shares saw a mixed performance, and US and European futures climbed, indicating a possible disparity in investor sentiment across regions. Brent crude prices rose, and gold remained stable.

In China, the annual inflation rate for April 2023 fell to 0.1%, below market estimates of 0.4%, marking the lowest inflation rate since February 2021 when the country experienced a brief deflation. The decline can be attributed to an uneven economic recovery following the removal of a zero-COVID policy, with prices for both food and non-food items continuing to ease. Core consumer prices, which exclude food and energy prices, increased 0.7% year-over-year, maintaining the same pace as in March. However, monthly consumer prices unexpectedly dropped by 0.1%, the third consecutive month of falling prices and missing estimates of a flat reading.

What to watch?

The Bank of England (BOE) is expected to raise interest rates for the 12th consecutive time today, as stubborn double-digit inflation continues to grip the UK economy. However, investors will be watching closely to see if the BOE follows the US Federal Reserve in signalling a potential pause in its rate-hiking cycle. Recent data on prices and wages have increased the risk that the BOE will continue to raise interest rates through the summer months, despite concerns about the impact on economic growth.

Meanwhile, Francois Villeroy, a member of the European Central Bank's (ECB) governing council, has stated that the ECB has only a "marginal" distance left to cover in terms of raising interest rates to combat inflation. This suggests that the ECB may also consider a rate hike in the near future to address rising inflationary pressures.

In the US, data on producer prices is expected to show a monthly rise of 0.3% in April, following a 0.5% decline in March. However, the year-on-year reading is forecast to slow to a gain of 2.5% from 2.7%. Additionally, weekly jobless claims are expected to rise to 245,000, which may further contribute to concerns about the pace of economic recovery in the US.