MTS Insights

The Bank of England voted 6-3 to hold Bank Rate at 3.75%, with three members favoring a +25 bps hike to 4.00%, as CPI inflation rose to +3.1% YoY in August and higher energy prices increased upside risks to the inflation outlook.

• CPI inflation increased to +3.1% YoY in August, with around +0.7 ppts of the +1.1 ppt overshoot relative to the 2% target attributed directly to energy prices, primarily motor fuels. Services inflation held at +3.4% YoY, down from +4.5% in March, while underlying inflation measures remained above target-consistent rates.

• Energy pressures intensified further, with Brent crude and UK wholesale gas prices up +36% and +78%, respectively, since the July Monetary Policy Report, reaching $106 per barrel and 207 pence per therm on September 14. The MPC said the Middle East conflict had become more protracted, increasing the likelihood of a higher and more volatile near-term inflation path.

• CPI inflation is now expected to rise to around +3.75% YoY in Q4 2026, up from the +3.2% projection in July, before reaching slightly above +4% in Q1 2027. Recent increases in wholesale oil, gas, and electricity costs accounted for almost all of the upward revision to the near-term outlook.

• There remained little evidence of material second-round effects in wages and prices, while indirect energy pass-through had been smaller than initially expected. However, the MPC judged that the risk of second-round effects had increased since July and could rise further if elevated energy prices persisted, particularly as above-target inflation coincides with upcoming wage-setting decisions.

• Economic activity proved more resilient than expected, with GDP growing +0.4% QoQ in Q2, +0.1 ppt above the July forecast, and +0.4% MoM in July. Staff raised their Q3 GDP estimate to +0.4% QoQ from +0.1%, although business surveys continued to indicate somewhat weaker growth.

• Labour market conditions remained soft, with unemployment at 4.9% in the three months to July and private-sector regular wage growth easing to +2.9% YoY from +3.3% at the start of 2026. Other indicators suggested underlying private-sector wage growth of around +3.5%, slightly above the Bank's estimate of a target-consistent rate.

• Six MPC members favored holding Bank Rate at 3.75%, judging that tight financial conditions and domestic economic slack continued to restrain inflation despite increasing upside risks. Three members preferred a +25 bps hike to 4.00%, arguing that stronger activity, potentially stabilizing slack, and the risk of second-round effects warranted a proactive tightening to help anchor inflation expectations.

• The MPC unanimously adopted a multi-year plan to reduce its monetary-policy gilt holdings to zero, with £368 billion remaining after £120 billion is set aside to back banknote issuance. The portfolio will decline by an average £46 billion annually through September 2034, combining £20 billion of annual active sales with maturing gilts.

The Bank of England voted 6-3 to hold Bank Rate at 3.75%, with three members favoring a +25 bps hike to 4.00%, as CPI inflation rose to +3.1% YoY in August and higher energy prices increased upside risks to the inflation outlook.

• CPI inflation increased to +3.1% YoY in August, with around +0.7 ppts of the +1.1 ppt overshoot relative to the 2% target attributed directly to energy prices, primarily motor fuels. Services inflation held at +3.4% YoY, down from +4.5% in March, while underlying inflation measures remained above target-consistent rates.

• Energy pressures intensified further, with Brent crude and UK wholesale gas prices up +36% and +78%, respectively, since the July Monetary Policy Report, reaching $106 per barrel and 207 pence per therm on September 14. The MPC said the Middle East conflict had become more protracted, increasing the likelihood of a higher and more volatile near-term inflation path.

• CPI inflation is now expected to rise to around +3.75% YoY in Q4 2026, up from the +3.2% projection in July, before reaching slightly above +4% in Q1 2027. Recent increases in wholesale oil, gas, and electricity costs accounted for almost all of the upward revision to the near-term outlook.

• There remained little evidence of material second-round effects in wages and prices, while indirect energy pass-through had been smaller than initially expected. However, the MPC judged that the risk of second-round effects had increased since July and could rise further if elevated energy prices persisted, particularly as above-target inflation coincides with upcoming wage-setting decisions.

• Economic activity proved more resilient than expected, with GDP growing +0.4% QoQ in Q2, +0.1 ppt above the July forecast, and +0.4% MoM in July. Staff raised their Q3 GDP estimate to +0.4% QoQ from +0.1%, although business surveys continued to indicate somewhat weaker growth.

• Labour market conditions remained soft, with unemployment at 4.9% in the three months to July and private-sector regular wage growth easing to +2.9% YoY from +3.3% at the start of 2026. Other indicators suggested underlying private-sector wage growth of around +3.5%, slightly above the Bank's estimate of a target-consistent rate.

• Six MPC members favored holding Bank Rate at 3.75%, judging that tight financial conditions and domestic economic slack continued to restrain inflation despite increasing upside risks. Three members preferred a +25 bps hike to 4.00%, arguing that stronger activity, potentially stabilizing slack, and the risk of second-round effects warranted a proactive tightening to help anchor inflation expectations.

• The MPC unanimously adopted a multi-year plan to reduce its monetary-policy gilt holdings to zero, with £368 billion remaining after £120 billion is set aside to back banknote issuance. The portfolio will decline by an average £46 billion annually through September 2034, combining £20 billion of annual active sales with maturing gilts.

The Federal Reserve raised the federal funds target range by +25 bps to 3.75%-4.00%, its first rate hike since July 2023 and the first tightening since the easing cycle began in September 2024, as stronger economic conditions and insufficient inflation progress shifted the Committee toward tighter policy.

• The FOMC unanimously raised rates by +25 bps after five consecutive pauses, reversing part of the 175 bps of easing delivered during 2024 and 2025. The target range is now at its highest since December 2025 but remains 150 bps below its 2023 peak.

• The 12-0 vote represented a notable shift from July, when Hammack, Kashkari, and Logan favored a +25 bps hike while nine members voted to hold. The September statement also added that "domestic spending has been resilient" and said the hike would support a timelier return to the 2% inflation target.

• The September SEP showed stronger growth and labor market projections, with the distributions for 2026 and 2027 GDP shifting higher and no members now seeing growth risks tilted to the downside. Most participants projected year-end 2026 unemployment around 4.0%-4.1%, while nearly all expected unemployment to remain at or below 4.3% in 2027.

• Inflation projections changed comparatively little, with median headline and core PCE forecasts for 2026 and 2028 each rising only +0.1 ppt, while a large majority of participants continued to see inflation risks tilted to the upside. The relatively modest forecast changes contrasted with the larger reassessment of growth and employment.

• The projected federal funds rate path shifted materially higher, with the 2026 median indicating at least one additional +25 bps hike after September's increase. The 2027 distribution remained wide, although a plurality of participants projected a rate consistent with another increase by the end of next year.

• Chair Kevin Warsh said the Committee had already agreed in July that inflation was too high but chose to wait for additional information. He said September's hike reflected a stronger economy, insufficient progress on inflation, and a changed geopolitical outlook, while emphasizing that underlying inflation had not been moving toward 2% clearly and quickly enough.

• Warsh declined to characterize the move as the beginning of a sequence of hikes and reiterated that he was "not in the forward guidance business." He described the increase as removing "a dose of accommodation" rather than clearly placing financial conditions in restrictive territory, leaving future decisions dependent on incoming conditions.

Builder confidence in the market for newly built single-family homes fell three points to 32 in September.

• Current sales conditions fell four points to 35.
• Sales expectations in the next six months dropped six points to 37.
• Traffic of prospective buyers held steady at 23.
• The latest HMI survey found that 38% of builders cut prices in September, up from 35% in August. The average price cut remained at 6% for the sixth consecutive month.
• Meanwhile, 66% of builders reported using sales incentives in September, up from 63% in August and the highest share since 67% posted in December.

August monthly housing starts key highlights:

• The trend in housing starts was down in August 2026 compared to July, with a decrease of 1.3% to 244,149 units.
• The trend measure is a 6-month moving average of the monthly seasonally adjusted annual rate (SAAR) of total housing starts for all areas in Canada.
• Actual housing starts were down 2% year-over-year in centres with a population of 10,000 or greater. 17,691 units were recorded in August 2026, compared to 18,112 units in August 2025.
• The year-to-date total was 149,542 units, down 4% from the same period in 2025.
• Montréal posted a 6% month-to-month increase in the 6-month trend, driven by higher starts of all types.
• Vancouver also recorded a 6% increase due to higher multi-unit starts.
• The trend measure in Toronto was flat, as the trends for both single-detached and multi-unit starts were unchanged.
• The total monthly standalone seasonally adjusted annualized rate of housing starts for all areas in Canada was flat in August 2026, at 229,046 units compared to 229,360 units in July 2026.
• Rural starts were estimated at a seasonally adjusted annual rate of 11,224 units.

The IBC-Br dropped 0.2% in July 2026 compared with June 2026 in the seasonally adjusted series, with changes of -1.2% in agriculture, -0.4% in industry, and 0.0% in services. The IBC-Br excluding agriculture fell 0.1% over the month.

• In the quarter ending in July 2026 compared with the quarter ending in April 2026, the index recorded a 0.3% decline.
• Over the past 12 months, the indicator has risen 1.5%.

UK CPI inflation accelerated to +3.1% YoY in August from +2.9% in July, while prices rose +0.5% MoM. Annual inflation has now increased for two consecutive months after reaching +2.6% in June.

• Transport was the largest upward driver, with prices rising +4.6% YoY and +1.5% MoM. Motor fuel inflation jumped to +23.0% YoY from +15.5% in July, while air fares increased +6.2% MoM.
• Petrol prices increased 9.1p MoM to 161.3p/litre, the highest since November 2022, while diesel rose 14.2p to 181.8p/litre. Food inflation was unchanged at +1.3% YoY, while housing & household services accelerated to +4.9%.
• Core CPI remained unchanged at +2.6% YoY, with services inflation steady at +3.4%. Goods inflation accelerated to +2.7% from +2.2%, reaching its highest rate since September 2025.

ADP estimates that US private employment increased at an average pace of 16.25k per week in the four weeks to August 29th, up from a pace of 12.25k in the four weeks to August 22nd.

• This week continues the trend of a reacceleration in the pace of hiring and is the fastest since the week of July 4th.
• There was a slight upward revision in the previous week's Pulse data point, from 12,000 to 12,250.