BoE Interest Rate Decision Preview: Focus on vote split amid high inflation and economic gloom

• The Bank of England is likely to return to a 50 bps rate hike in December.
• The vote split will be closely scrutinized in the absence of Governor Bailey’s press conference.
• Fate of the GBP/USD direction hinges on the central bank’s language in the policy statement.

The Bank of England (BoE) is likely to return to its conservative stance in the final meeting of this year, having delivered its biggest rate hike in 33 years in November. The BoE will announce its interest rate decision at 12:00 GMT this Thursday, accompanied by the Minutes of the meeting.

BoE rate-setters seen to be divided

It’s not a ‘Super Thursday’ for the BoE but a 50 basis points (bps) increase to the policy rate is widely anticipated, lifting it from 3.00% to 3.50% at its December meeting. The central bank is expected to slow down the pace of tightening after an extraordinary 75 bps rate hike announced last month.

With the United Kingdom’s annual inflation rate at a 41-year high of 11.1% in October and a prolonged economic recession forecasted by the BoE, a 50 bps rate hike may not come as a surprise.

Source: FXStreet

Therefore, the vote split on the size of the interest rate increase will be closely scrutinized along with the language in the policy statement, in absence of BoE Governor Andrew Bailey’s press conference.

At the November policy meeting, two Monetary Policy Committee (MPC) members, Silvana Tenreyro and Swati Dhingra, voted for smaller increases of a quarter and half a percentage point respectively. A majority of the policymakers said rates would need to rise higher still but Governor Bailey said he expects the terminal rate not to be as high as previously predicted by the markets.

This time around, analysts and industry experts believe that the voting composition on the rate hike could be divided, with a three- or even four-way split on the committee. The vote split could likely show “one member voting for no change, one for a 25 bps, five for a 50 bps and two for a three-quarter point increase,” according to Bank of America.

BoE Deputy Governor Dave Ramsden said last month, “I expect that further increases in the bank rate are going to be required.” Meanwhile, another hawk, Jonathan Haskel said after the November policy meeting that "concern for me is the risk that if price rises become embedded, monetary policy would have to be tighter for longer."

With evident signs of the UK economy already into recession and sky-high inflation deepening the economic pain, the BoE seems less likely to go for an outsized rate hike, since the US Federal Reserve is also seen slowing down its tightening path by announcing a 50 bps rate increase on Wednesday. That said, the odds of the UK central bank hinting at nearing the end of its rate hike cycle look unlikely as the BoE has a long way before inflation is brought under control.

Trading GBP/USD with the BoE

The GBP/USD pair is facing dual risks, awaiting the critical Fed and BoE interest rate decisions. Following the softer US CPI release on Tuesday, the Fed’s Dot Plot chart and Chair Jerome Powell’s press conference will hold the key to determining the future policy course. In a case where Wednesday’s FOMC decision confirms the ‘Fed pivot’ narrative, then GBP/USD’s downside will likely be limited, even on a dovish BoE verdict.

The US Dollar’s price action and persisting risk sentiment will also significantly influence Cable’s reaction to the BoE policy decision. In any case, the outcome is set to trigger massive volatility for GBP/USD, with the Pound Sterling looking hopeful (for now).

A surprise 75 bps rate hike (personally I see a slim chance) could infuse more power to the Pound Sterling bulls, taking GBP/USD further toward 1.2600.

However, a split in the rate hike voting composition, with more MPC members leaning towards a 25 bps hike than the previous meeting, will be seen as a dovish BoE shift. GBP/USD could snap its uptrend and correct toward the near-term support at around the 1.2200 level.