Economic preview: Bank of England makes rate call

There's much for the Bank of England's monetary policy committee (MPC) to consider this week before making its decision on UK interest rates on Thursday.

On Tuesday, the Office for National Statistics publishes its August consumer price index (CPI), the UK's most broadly referenced measure of inflation, while on Wednesday, the ONS delivers its latest findings on the labour market.

The unemployment rate is of almost secondary interest given the growing disparity between CPI and wage growth, therefore all eyes will be cast towards the average earnings line on Wednesday's report.

MPC interest rate decision

All of this before the MPC makes its call at midday on Thursday. Meanwhile, some concern over the softening in growth shown in recent weeks is expected.

Purchasing manager indexes have turned lower, industrial production is expanding at a rather anaemic rate and several economic organisations, including the BoE, have lowered their forecasts for UK growth.

The latest came on Friday from the British Chamber of Commerce, noting a disappointing economic response to the fall in sterling since last year's EU referendum.

"A cheaper currency does not automatically mean an export boom, no matter how some politicians and commentators will it to happen," says BCC director general Adam Marshall.

The signals coming from the economic growth side of the equation suggest, therefore, the Bank of England hawks have not added to their numbers since the August meeting, at which there were just two – down from three at the June meeting.

Much will depend, however, on the inflation side of the monetary policy equation: the data on Tuesday and Wednesday will be paramount.

The weak pound could have further impact on consumer prices - Source: Shutterstock

UK consumer and producer price inflation

CPI came in at 2.6% in July, down from 2.9% in the previous month.

Domestic inflationary pressures are relatively benign, but weak sterling – particularly against the euro, losing 8.5% since May – means the prices of imported goods, including raw materials used by manufacturers, are adding inflation at the input level.

Some companies, including retailers and producers, have avoided passing on these costs to consumers by hedging their foreign exchange exposure.

But pressure is building and it wouldn't be a surprise to hear of BoE concerns over the weak pound at Thursday's MPC meeting.

"We could start to see references to sterling weakness and imported inflation having 'second-round effects' – rising imported input costs potentially boosting domestic prices," says Viraj Patel at ING.

Analysts expect annual CPI inflation in August to tick higher to 2.7% when the data is published on Tuesday.

UK wage growth

The ONS labour market report on Wednesday is expected to show the rate of unemployment remained at a 42-year low of 4.4% in July.

This, however, isn't what most market watchers will be focused on in this report, as the squeeze on household budgets this year makes wage growth a much more interesting prospect.

Average annual earnings grew at an annual rate of 2.1% in June – according to the last labour market report – up from 1.9% in the prior month.

Analysts expect little move in the July rate – perhaps another tick higher to 2.2% if the strength in the labour market endures. Indeed, most are optimistic that average earnings will eventually expand and CPI contract to provide an environment of real wage growth.

Kallum Pickering, Berenberg senior UK economist says: "Labour demand has continued to rise relative to supply – increasing vacancies relative to unemployment. Over time we can expect real wages to recover from the current fall."

US retail sales and Michigan consumer sentiment

July sales showed a robust 0.6% increase on June's, and a lively 4.2% jump on July 2016 as consumers raised their discretionary spending, both in the high street and online.

Forecasts for August's sales, published on Friday, are for a 0.4% rise on July, keeping the momentum running and suggesting the US economy remains robust enough to withstand at least one further interest rate increase this year.

Also on Friday, the University of Michigan publishes its influential measure of consumer confidence, and with the sentiment index higher in the first eight months of 2017 than in any year since 2000, a sharply lower move is not expected.

Industrial production data is due this week in China, the US and UK - Source: Max Pixel

The best of the rest

Also in the US on Friday, industrial production and capacity utilisation data for August are published by the Federal Reserve and analysts are looking for further growth.

In China on Thursday, data for retail sales and industrial production in August are also expected to show growth from the previous month, while industrial production in the eurozone for July on Wednesday is also seen improving.

On Thursday, consumer price inflation in the US for the month of August is seen ticking up to an annual 1.8% from 1.7% in July.

Corporate earnings

In the US, the earnings calendar looks very bare this week. Among the biggest companies reporting are United Air Lines on Monday, Farmer Brothers on Tuesday and Oracle on Thursday.

In the UK, there's some retail focus. On Tuesday, Ashtead Group and JD Sports Fashion, On Wednesday Dunelm Group and Galiford Try. Thursday sees Next and Morrison Supermarkets report, and on Friday it's JD Wetherspoon.