Mizuho EMEA BoE Meeting Preview

​ BoE July Meeting Preview: 6-3 Hold

​ TL;DR: On Thursday, the BoE will hold its July meeting. We expect a 6-3 hold, consistent with current market pricing. While energy prices and concerns about second-round effects continue to argue for caution, we think the MPC remains closer to its A/B scenarios than to the hiking-led Scenario C. Growth is moderating, the labour market continues to soften and recent inflation data have not provided convincing evidence that domestic inflation is reaccelerating. Against that backdrop, the Committee is likely to keep rates at 3.75%, retain a tightening bias and wait for greater clarity on both the inflation outlook and the government's October fiscal plans before considering a more forceful response.​ ​ ​ ​ What does that mean for GBP rates? ​ ​ Oil remains the key swing factor for GBP rates, but we do not think it changes the medium-term macro story. A renewed spike in energy prices could easily push front-end and belly yields higher as markets revisit inflation persistence and additional BoE tightening risk. However, unless that feeds into a genuine reacceleration in wages and services inflation, we would view further sell-offs as opportunities to receive fixed rather than the start of a structurally higher yield regime. The UK economy still looks closer to a slowing-growth, restrictive-policy environment than one requiring a sustained hiking cycle, leaving room for further 2s10s steepening.

​ ​ UK economy: Recent data prints have a dovish read ​ ​ The UK economy continues to show signs of slowing momentum beneath what remains a relatively resilient headline growth picture. The growth outlook still relies heavily on investment holding up despite a backdrop of elevated uncertainty, higher funding costs and a corporate sector that remains cautious. At the same time, labour demand has been softening for several quarters as weaker consumption, higher employment costs and restrictive financial conditions weigh on hiring intentions. While the labour market may see some seasonal support through the summer (this year including the World Cup and several heatwaves), it remains difficult to make the case for a sustained rebound in demand. Households remain squeezed, business failures continue to rise and much of the economy still appears to be adjusting to a period of higher rates.