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BoE Inflation Report to leave rate hike door ajar

That makes the central bank’s latest Inflation Report on Wednesday all the more crucial to figuring out whether borrowing costs will climb from their current 5.75 percent in the next few months.

After five hikes in a year, the BoE will probably leave open the possibility of another rise to 6 percent as hawkish Governor Mervyn King won’t want to risk lighting another fire under the housing market by signalling a peak too clearly.

Nor does the central bank look likely to state explicitly that rates will rise. Forecasting inflation significantly above target without higher rates would immediately call into question why it did not raise rates last week.

“We think the projections will not rule out the possibility of a further hike to 6 percent in the coming months,” said David Hillier, economist at Barclays Capital. “What actually happens to rates will likely depend on the tone of the forthcoming activity data.”

And there’s the rub. A lot of the data over the next few months is going to be skewed by a lot of special factors.

For a start, July was the wettest on record. The British Retail Consortium said that meant people shied away from buying new summer clothing. June retail sales were also hit by the rain as Britons could not indulge their love of barbecues and other summer goods.

Floods in parts of the country in the second half of July will have also hit activity there. But food prices are set to rise because of crop damage.

The latest outbreak of foot and mouth disease poses even more upside risk to food prices. Meat prices rose sharply when an epidemic occurred in 2001.

Further out, the floods may boost activity as victims are forced to buy new furniture and carpets. The bill for insurance firms is estimated at more than 3 billion pounds.

Policymakers are hence likely to stress the uncertainty surrounding their forecasts, particularly given the recent turmoil in credit markets around the world.

“We believe the MPC will remain focussed on the PMIs, and indicators of housing and retail sales, to assess the impact of past rate hikes. In the case these remain resilient, the committee will likely raise policy rates again,” said Amit Kara, UK economist at UBS.

“If, however, credit market events persist, and raise the cost of capital for UK corporations materially and simultaneously trigger tighter credit conditions for the household sector, the MPC will remain cautious.”