Rate hike from BoE more likely following robust Q3 growth data

UK growth figures have just shown that our economy picked up speed in the third quarter of this year.

The first reading for Q3 GDP came in at 0.4% versus 0.3% expected (and previous). This is an important release, as it is the last key piece of data we have before the Bank of England meet next week to decide on whether to hike interest rates, for the first time in over a decade, or not.

Last week, economists were forecasting around an 80-85% chance of them hiking by 0.25% next Thursday, but these odds have reduced more recently (to around 70%) as dovish comments from BoE policymakers made things less certain. BoE Deputy Governor, Cunliffe, said yesterday that whether to hike or not was still an “open question” and this came after less hawkish comments from Carney and two new rate-setters last week. Today’s robust growth figure will certainly help boost the chances of a rate hike, but the big question is whether this increase in economic activity gives the BoE enough wiggle room to justify a hike.

If they weren’t to hike next week, it would certainly be a surprise to the majority of the market and the BoE would certainly lose credibility (after previously strongly hinting at one). We also think that even if they do hike, any gains in the Pound would likely be short-lived. This is because it’s already largely priced-in (buy the mystery, sell the history) and also it’s likely to be a one-off. For the Pound to really make some major gains based on BoE monetary policy, the market would need to believe there was going to be a series of rates hikes and with Brexit on the cards this is extremely unlikely.

As a result, the Pound has clawed back around 0.5 cent against both the Euro and USD and it now trades around the average rates we’ve seen this month. This might edge a little higher throughout today.

Next up we have the key ECB interest meeting tomorrow afternoon. They’re expected to announce a reduction in their quantitative easing efforts (Euro +ve), but they’re also likely to extend the period of this programme (Euro -ve). Traders will be looking closely at these actions but also carefully monitoring the tone of the central bank in the accompanying press conference. There’s been quite a build up to this meeting, so we might see some volatility.