Fawad Razaqzada August 2, 2018 9:20 AM
The BoE looks almost certain in our view to raise interest rates for the second time since the global financial crisis. With inflation already being above target, it can’t justify holding rates this low as even modest economic growth in the coming months is likely to generate further inflationary pressures.
The Bank of England’s eagerly-anticipated monetary policy announcement is due at 12:00 BST (07:00 EDT) today. As well a decision on interest rates, we will get to see the Monetary Policy Committee’s vote split, the minutes of the meeting and the latest growth and inflation forecasts in the Quarterly Inflation Report. The BoE’s press conference with Governor Mark Carney will start half an hour later at 12:30 BST.
- The BoE looks almost certain in our view to raise interest rates for the second time since the global financial crisis. With inflation already being above target, it can’t justify holding rates this low as even modest economic growth in the coming months is likely to generate further inflationary pressures. The BoE wouldn’t want to come across as being too hawkish however given the uncertain future Britain is facing. At the same time though, it wouldn’t want to sound too pessimistic either as this may have unintended consequences on business and household confidence.
- Along with the vast majority of other market watchers, we expect the BoE to hike the Bank Rate by 25 basis points to 0.75% owing to inflation rising and remaining above target and a decent, albeit not eye-catching, domestic economic performance in the second quarter. This outcome is about 90% likely which means the pound’s potential rise in reaction to the news would be limited, ceteris paribus.
- We anticipate there to be one or at most two dissenters, with Sir Jon Cunliffe likely to be the sole dove. So we therefore expect to see an 8-1 split vote in favour of a rate hike. The more the number of dissenters, the more bearish may be the response from the pound.
- There should be a unanimous vote on Asset Purchase Programme to keep it unchanged at £435 billion. Anything else in this regard would be a major surprise and therefore should move the pound significantly.
- Brexit-related uncertainty and trade concerns are likely to keep policy tightening modest for the foreseeable future. That’s also the message Mark Carney is most likely to give to the market when he speaks at the presser. However, in the event the BoE is less alarmed about these and other risks facing the UK and global economies then that should be pound-positive.
- The Inflation Report is unlikely to show any noticeable changes in GDP and CPI forecasts from the previous updates. Therefore any significant changes could move the pound in the direction of the surprise, everything else being equal.
- With a rate hike mostly priced in, any significant moves for the pound or the FTSE will most likely come from signals about the path of monetary policy in the future. On that note, the market currently puts about 10-15% chance on another hike before the year is out. It is very likely that the MPC would want to wait until there is more clarity on Brexit before entertaining the idea of more aggressive tightening.
- Ahead of the BoE rate decision, the pound has come under pressure against the dollar and yen but has held its own slightly better against the euro, even if the EUR/GBP was trading higher at the time of writing.
- Judging by the behaviour of the pound, market participants are apparently not anticipating seeing a hawkish BoE today, even if rates are likely to rise. However, with a dovish hike priced in, we can’t see the GBP/USD falling below 1.30 on a closing basis today – unless the BoE refuses to hike. We therefore think that the pound is likely to stage a rebound on the back of today’s rate decision, though we are not expecting to see the moon either.
StoneX Financial Ltd (trading as “City Index”) is an execution-only service provider. This material, whether or not it states any opinions, is for general information purposes only and it does not take into account your personal circumstances or objectives. This material has been prepared using the thoughts and opinions of the author and these may change. However, City Index does not plan to provide further updates to any material once published and it is not under any obligation to keep this material up to date. This material is short term in nature and may only relate to facts and circumstances existing at a specific time or day. Nothing in this material is (or should be considered to be) financial, investment, legal, tax or other advice and no reliance should be placed on it.
No opinion given in this material constitutes a recommendation by City Index or the author that any particular investment, security, transaction or investment strategy is suitable for any specific person. The material has not been prepared in accordance with legal requirements designed to promote the independence of investment research. Although City Index is not specifically prevented from dealing before providing this material, City Index does not seek to take advantage of the material prior to its dissemination. This material is not intended for distribution to, or use by, any person in any country or jurisdiction where such distribution or use would be contrary to local law or regulation.