Heads up: UK September GDP in focus but will weak growth really stop the BOE from hiking again?

The UK September monthly and latest quarterly GDP report are due at 0700 GMT today and the question that markets will be asking is just how bad would the numbers have to be to convince the BOE to take its foot off the rate hike pedal?

The estimates are pointing to a flat reading after the economy expanded by just 0.1% in August. And that follows from the more encouraging 0.4% increase in July, suggesting that growth momentum is becoming rather uneven in the past quarter.

That being said, the bigger picture isn't quite as soft as the latest monthly numbers might suggest. The UK economy expanded by 0.7% in the three months to August, largely supported by services activity. Meanwhile, manufacturing and construction have also been keeping pace, albeit less convincingly.

Besides the monthly figures, we'll also be getting the preliminary Q3 GDP estimate. So, that should ffer a better sense of whether the economy is holding up or starting to buckle under the weight of higher borrowing costs and surging energy prices. The latter have seen some better developments in the past week but will still need time to filter through back to the economy.

At the balance, a downside surprise in the numbers could weigh on sterling and temper expectations for further BOE tightening. But unless we see a particularly ugly set of numbers, I reckon that today's report will do little to materially change up the BOE's plans for December at this juncture.

Markets are currently pricing in roughly 71% odds of another 25 bps rate hike next month, following the November move to bring the bank rate to 4.25%. The reason for such aggressive pricing remains rather straightforward, and that is inflation is still the bigger problem here.

UK headline annual inflation climbed to 3.5% in September while core annual inflation rose to 2.8%, with services inflation proving stubborn at 3.7%. And as things stand, the BOE is also projecting headline inflation to reach around 5% by the middle of next year. That's hardly a comforting backdrop as we approach the final stages this year.

As such, policymakers are being left with a rather uncomfortable balancing act. Weakening growth prospects may eventually force the central bank into a more difficult decision but for now, the bigger danger is allowing inflation pressures to become more entrenched.

In that lieu, it might require considerably more than just one disappointing growth report to change the more hawkish course that the BOE is set on at the moment.

This article was written by Justin Low at investinglive.com.