Must the BoE Now Consider Larger Rate Hikes? Fed on Course to Pause? Oil Bounces Back

By Craig Erlam, Senior Market Analyst, UK & EMEA, OANDA

A truly devastating jobs report for BoE policymakers

It’s not often that you would refer to a jobs report that delivers a drop in unemployment, record employment and a rise in wages as horrible, but that is exactly what the Bank of England will be feeling today.

The central bank has raised interest rates for the last 12 meetings in a row and yet the economy is showing the kind of resilience that few would have anticipated. This creates an enormous headache for the MPC as it desperately wants to avoid crashing the economy in order to weaken the labour market and get wages and inflation down to more sustainable levels but that’s looking increasingly possible at these levels.

A rate hike at the next meeting is now unavoidable – assuming it wasn’t already – but a 50 basis point increase could suggest the BoE is throwing in the towel in trying to deliver 2% inflation and a soft landing for the economy. And the withdrawal of any votes for a pause will be equally important as the scale of the hike – we’ve seen two for four consecutive meetings – ​ and would be another strong sign that the BoE is very concerned.

Is a Fed pause as locked in as markets think?

What the BoE would give to now be in the Fed’s position. Inflation is falling and has been for almost a year, while core inflation is also on the decline even if it stands above 5% which is still too high. But progress is clear and there is plenty of optimism that the trend will continue, enabling the Fed to perhaps not just pause tomorrow – which markets are heavily pricing in – but maybe even bring an end to the tightening cycle altogether.

Not that they’ll be ready to acknowledge that yet but a pause will certainly be a step in the right direction. The BoE will be wondering where they’ve gone so wrong. Having been one of the first out of the traps, they may be the last to cross the finish line.

Oil bounces back amid more favourable developments

Oil prices are staging a comeback today, perhaps buoyed by the softer inflation data which may open the door to the end of the Fed’s tightening cycle and enable the soft landing it always hoped for. That said, there may be a technical element to it as well, with the price having traded around its 2023 lows in the run-up to the release.

There was always likely to be two bullish cases for crude and this only slightly aids one of those. Another unified move from OPEC+ could have been that but instead the Saudis were forced to go it alone. The other was a stronger economy which has looked increasingly unlikely recently but positive inflation reports from the US and eurozone and a rate cut in China certainly help that case. There’s still a long way to go.

Gold traders seemingly not so upbeat

Gold isn’t aboard the Fed pause train yet though, in fact, it slipped after the inflation report which may suggest not everyone is on the same page. This may be a reflection of the still stubborn core inflation number that while enabling no more hikes could keep rates higher for longer. But clearly, what the Fed does and says tomorrow could play a big role in whether we see a breakout from the range gold has traded in over recent weeks. Based on today’s response, traders may not be feeling so upbeat. The question is will the Fed change that or compound those fears?