As the issue of inflation persists and wage data remains robust, the Bank of England (BOE) appears compelled to raise the bank rate by an additional 25 basis points this week. While the decision tomorrow seems highly anticipated, the pivotal question pertains to the extent the central bank must act to alleviate inflationary pressures.
Ultimately, this determination hinges on the forthcoming data. However, it is essential to recall that the initial expectations preceding tomorrow's decision have been tempered, particularly following the release of the UK's June Consumer Price Index (CPI) figures. Previously, market participants had even contemplated a substantial probability of a 50 basis points rate hike by the BOE. Nonetheless, the prevailing pricing now indicates that a 25 basis points adjustment is the most probable course of action.
Here's a look at the OIS curve in pricing in the future path of rate hikes:
Based on the insights from the OIS (Overnight Index Swap) market, a 25 basis points rate hike has already been completely factored in. Interestingly, traders appear to have gone to the extent of potentially overestimating the situation, assigning a 37% probability to a more aggressive 50 basis points adjustment. Consequently, the prevailing sentiment suggests that traders will be anticipating the Bank of England (BOE) to maintain its recent policy discourse. This implies that they hope the BOE will uphold its stance of retaining the option to implement additional tightening measures in the forthcoming months.