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Bank of England Preview: Beyond The Rate Decision Here's What To Watch

By (Jason Martin/ OverviewJun 20, 2018 03:09
Bank of England Preview: Beyond The Rate Decision Here's What To Watch
By (Jason Martin/   |  Jun 20, 2018 03:09
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  • Markets consider a rate hike off the table, look for hints about August
  • Policymakers expected to confirm weak Q1 growth was temporary
  • May be slight upside risk for a more hawkish vote
  • BoE Governor Carney comments could overshadow policy decision
  • UK political tension over Brexit might steal sterling spotlight

The Bank of England won’t budge on current rates 0.50% at Thursday’s monetary policy meeting, according to the markets. But the meeting’s minutes may hold the key for adjusting bets—currently a coin toss—for a rate hike in August.

None of the 63 economists surveyed by Reuters expect an interest rate hike to come at Thursday’s meeting, making it a far cry from the excitement seen last week when two major central banks delivered previously unexpected news: the Federal Reserve pulled the trigger on a 25-basis-point increase and upped its bets to four rate hikes in 2018 from the prior three; the next day the European Central Bank announced a further tapering of its asset purchase program and projected that program’s demise to come at the end of the year (with the caveat that it had no intention of moving rates up until well into 2019).

While no change is expected this time around, 55% of analysts polled by Bloomberg expect an increase in August, down from 60% in May, although financial markets are pricing in a little over a 50% chance of an August hike. Any clues on what the BoE may have planned for August will therefore be of utmost importance to traders.

Confirmed growth outlook could mean more hawks

At its last meeting in May, the BoE recognized the weak growth figures for the first quarter and though the Monetary Policy Committee (MPC) suggested it was likely temporary, a result of adverse weather, policymakers indicated they wanted confirmation of that fact before returning to tightening.

Since that meeting, incoming second-quarter data have been mixed: weak April data for manufacturing, trade, and wages, but a solid reading on the services sector in May and strong readings of retail sales in both April and May. Despite that ambiguous evidence, BoE Deputy Governor Dave Ramsden said earlier this month that the assumption that first-quarter weakness was temporary had been confirmed.

“The data we have had so far suggests our interpretation of the slowdown in Q1 as temporary looks to be being born out,” he told the Barclays Inflation Conference on June 7.

Back in May, the BoE made it clear that if the weak first-quarter data was shown to be short-lived, the path for further removal of accommodation would be clear. “The Committee’s best collective judgement therefore remains that, were the economy to develop broadly in line with the May Inflation Report projections, an ongoing tightening of monetary policy over the forecast period would be appropriate to return inflation sustainably to its target at a conventional horizon,” the minutes from the last meeting said.

So, if Ramsden—generally considered to be one of the most dovish members of the BoE—feels comfortable that things have gotten back on track, markets would do well to focus on how the vote for a rate hike is split.

In May, only two of the nine MPC members—Ian McCafferty and Michael Saunders—favored a rate hike, as they have done in each meeting since March. Although the consensus is that will remain unchanged, with seven members voting for rates to remain at the current 0.50% and those same two to vote for a rise, there may be some upside risk of another member joining the hike camp.

Though Thursday’s meeting might be preemptive, there does at least exist some chance that another member could join the hawkish team, pushing the vote to 6-3. But a cautious stance would suggest that most policymakers would prefer to wait for the August meeting when they will have preliminary second-quarter growth figures, accompanied by updated economic projections which would add weight to that meeting.

But even barring a shift in votes, the language reflecting the current growth outlook in the minutes should provide some clues on where policymakers stand.

Carney may upstage the decision itself

The wild card in this rate decision may come straight from the mouth of BoE Governor Mark Carney. Although there is no press conference included in this meeting, Carney will be delivering his annual speech at the Manor House in London at 4:15PM ET (20:15GMT) Thursday. In June 2017, Carney used the event to reflect his view that the UK was not ready for higher rates.

“In the coming months, I would like to see the extent to which weaker consumption growth is offset by other components of demand, whether wages begin to firm, and more generally, how the economy reacts to the prospect of tighter financial conditions and the reality of Brexit negotiations,” Carney explained at that time, just a week after the BoE had voted 5-3 to keep rates on hold.

Traders will be on high alert to see if the BoE chief adds clarity to any message in the minutes.

Brexit uncertainty remains

With just four months left until a self-imposed deadline of October for discussions between the UK and the European Union over Britain’s exit from the economic bloc, negotiations should be wrapped up. This would allow both parties to have time to get parliamentary approval for the final deal.

Even ignoring the fact the next UK-EU summit is set for the end of this month, advancement seems to have become an internal UK political issue this week as British Prime Minster Theresa May wrestles with politicians over their call for a “meaningful vote.” Essentially, UK lawmakers are demanding the right to decide what happens next if they vote down the divorce deal.

Last month’s BoE minutes reiterated that Brexit uncertainties were straining business investment and referred to “the exceptional circumstances presented by Brexit.” Very little has changed since then, but it would not be outside the realm of expectations for the MPC to refer to the heightened degree of uncertainty given recent UK political tensions.

In any case, it’s unlikely that the continuing uncertainty would sway the BoE’s hand at this juncture. The overall impact on the economy, not to mention the outcome of the deal itself, remains, at best, a complete guess.

Will the pound still sing the Brexit blues?

Cable has gone through severe selling pressure which began as far back as April. Underwhelming data reduced expectations that the BoE would continue its gradual interest rate increases and markets began reducing bets for further hikes.

GBPUSD 120 Minute Chart
GBPUSD 120 Minute Chart

If conditions were normal, logic would dictate that the pound would find support at the slightest hint from the BoE that first-quarter weakness was a thing of the past and that further confirmation of economic growth would pave the way for future increases “at a gradual pace and to a limited extent.” But the political turmoil surrounding the “meaningful vote” over Brexit has completely taken over, pummeling pound to seven-month lows against the dollar as it dominated traders’ attention and giving the impression markets may have altogether forgotten that there is a policy decision on Thursday.

Unless there is a “meaningful” hint at more policy tightening, either in the policy vote, the meeting minutes and/or Carney’s own speech to the Manor House nine hours after the decision, the pound may find no relief from its current Brexit blues.

Bank of England Preview: Beyond The Rate Decision Here's What To Watch

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Bank of England Preview: Beyond The Rate Decision Here's What To Watch

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