UK: Q3 GDP renews speculation of a BoE rate hike next week – BBH

Analysts at BBH suggest that the stronger than expected UK’s Q3 GDP renews speculation (which had been softening) of a rate hike next week as part of Super Thursday, when the BOE inflation report will also be issued.  

Key Quotes

“Growth ticked up to 0.4% from 0.3% in Q2.  The market had expected an unchanged pace.  The year-over-year rate was steady though at 1.5%.  The upward revision to July services, showing a smaller decline in services spending, offsets the slightly softer than expected August services.”

“The case for a hike is clear.  Growth in Q3 was a little better than the MPC expected, inflation is above target, and the unemployment rate is slightly below what the MPC sees as sustainable.   The market (OIS), according to Bloomberg calculations, has an 87% chance of a hike discounted.  The case against a hike is that inflation appears poised to peak shortly, the economy is softening, and real wages are falling.  This may already be squeezing households, where an increase in the base rate is quickly passed through to households.”  

“That said, a hike would likely be a one-off.  Taking back the post-referendum rate cut is not the same thing as a sustained normalization cycle, such as the one the Federal Reserve is engaged.    We would not be surprised to see sterling, bought on speculation of a hike, to be sold on the fact.”  

“For today, sterling is bid, though it is trading within yesterday's ranges.  A move above $1.3230-$13240 is needed to lift the technical tone.  The 20-day moving average is found a bit lower at $1.3220, and sterling has not traded above this average for three weeks.”