UK retail sales data could shape BOE's December rate-hike debate

Today's economic calendar features the UK retail sales report as a key release, coming on the heels of the latest inflation and jobs data that have left the Bank of England weighing its options before the November gathering.

September's figures are projected to show a 0.1% monthly drop in retail sales, after a 0.5% advance in August. On an annual basis, the forecast is for a 1.0% gain, easing from the 2.4% seen before. While those numbers may look unremarkable at first glance, they carry weight for the wider picture surrounding the BOE's policy path.

September saw the UK's headline annual inflation rate rise to 3.5%, while core annual inflation moved up to 2.8% as well. That offers little comfort to the BOE, particularly given that officials are already dealing with high energy costs and the possibility that price pressures prove more entrenched.

The jobs data earlier in the week, meanwhile, came as something of a surprise. Unemployment dropped to 4.7% against expectations, and real wage growth edged up to 3.7%. Although ONS data-quality concerns could distort these figures, they still point to a mild improvement in the jobs market. Even so, the picture is not entirely positive, as job vacancies keep falling and point to softening demand for new hires.

In any event, a single report is not proof of a trend. The UK jobs market has shown softness through this year, and that deserves emphasis.

None of this means all signals are aligned for the BOE. The central bank still has to strike a balance between competing pressures.

Tougher inflation pressures strengthen the argument for tighter policy, yet a slowing labour market and soft consumer spending could fuel worries that the economy cannot handle elevated prices and higher borrowing costs.

What might today's retail sales numbers show then?

At present, market pricing puts about a 98% chance on a November rate increase. For December, the odds of an additional move stand near 45%.

I would not expect today's retail sales figures to alter the November outlook, even with a big surprise. Investors are already set on a rate hike, and BOE officials have given them little reason to think otherwise.

December is a different question, with the odds close to a coin toss at this stage.

A better-than-forecast release would bolster the view that consumer spending is sturdy enough for the BOE to continue raising rates. Conversely, a sharp miss could fuel more scepticism about how much further tightening the economy can bear at this point.

That is the key consideration for reading today's report. The focus is on what implications it holds for the December path, or even the year ahead.