Expect next week’s headlines to be dominated by the Bank of England’s Monetary Policy Committee (MPC) meeting on 4 August. Rates are set to increase, but how much? Pressure on the MPC to act ‘decisively’ is increasing: inflation has risen to 9.4 per cent, and the labour market remains surprisingly tight.
The MPC will also be acutely aware of the more hawkish global rate-setting climate. The ECB surprised in its last meeting, announcing a 50 basis point (bps) rise. This was despite issuing an unambiguous statement in June which outlined their intention to hike rates by only 25 bps. BoE governor Andrew Bailey has indicated that a 50 basis point hike is ‘on the table’, and this now seems the most likely course of action for the MPC.
Higher rates will continue to impact mortgage repayments. The latest Bank of England Money and Credit report showed that hikes are already feeding through – rates on existing mortgages ticked up to 2.07 per cent last month. The housing market has so far withstood affordability concerns, but a cooldown at some point is widely anticipated: housing market-watchers will cast a keen eye over the Halifax house price index released on Friday.
European unemployment data is released on 1 August, followed by the eurozone composite PMI on 3 August. The flash eurozone PMI on 22 July signalled a contraction, and further indications of a slowdown are likely in next week’s data. When asked about president Christine Lagarde replied that "the primary mandate of the ECB is price stability". Gloomy data could test this tough stance.
US PMI manufacturing data will be released on 1 August, followed by the services PMI index on 3 August. James Knightley, chief international economist at ING, argues that signs of spreading economic weakness "won’t deter the Fed from hiking aggressively in the near-term given its clear aim of getting inflation lower. However, it could contribute to less aggressive action later this year".
By the end of the week we will also have a clearer picture of the health of the US economy: 5 August sees unemployment and earnings figures released. Rising unemployment could signal that recession beckons, although slower wage growth would exert some downward pressure prices.