Economic developments since the last meeting have raised concerns of “stagflation” in the UK, i.e. slow growth with strong inflation. As the main constraint to growth is supply chain, we do not expect this to derail BOC’s monetary policy stance. We expect the central bank to vote unanimously to leave the Bank rate unchanged at 0.1% and 8-1 to keep the asset purchase program at 875B pound. BOE split evenly in August on whether basic conditions for rate hike have been met. The focus of this meeting is whether and how the two new committee members would affect this balance.
The dataflow released since the last meeting has sent a mixed picture about the economic outlook. On the positive side, the job market has continued to thrive. The unemployment rate slipped further to 4.6% in the three months to July. Meanwhile, the number of payrolls gained +241K to 29.1M in August. This marks a return to the pre- pandemic (February 2020) levels. Vacancies rose to a record 1.034M in June to August 2021. Inflation strengthened further. Headline CPI jumped +3.2% y/y in August, from +2% a month ago. The market had anticipated a jump to +2.9%. Note also that the increase of 1.2 ppts was the biggest on record. The ONS continued to warn of the temporary nature of strong price levels. Core CPI rose to +3.1% y/y from July’s +1.9%, beating consensus of 2.9%.
On the flip side, GDP growth eased to +0.1% m/m in July, from +1% a month ago. The PMI data also show that both services and manufacturing sectors are losing momentum. The services PMI dropped -4.6 point to 55 in August. While staying in the expansionary territory, the reading marks the slowest since February. The man