Watch BoE forecasts for clues on Autumn hike

Markets price almost 90% probability that rates won't change on Thursday

Watch BoE forecasts for clues on Autumn hike

Low probabilities

The reputation of the Bank of England’s May policy decision has very much preceded the event itself. Short-term rate markets this week priced an almost 90% probability that there would be no change in the Bank Rate on Thursday. As recently as the middle of last month, implied probability pointed to an all but certain 25 basis point rise. That was before BoE governor Mark Carney pulled the plug on expectations, saying in a BBC news interview that he didn’t “want to get too focused on the precise timing [of an interest rate rise], it is more about the general path”. A rate hike remained “likely” this year, he added, noting economic data had been “mixed”.

Missed expectations

Key readings over the last month have indeed missed expectations, including a faster than expected fall of inflation and the slowest annual economic growth in five years at the beginning of 2018. Completing the checklist of assessments that the governor has indicated would be critical for tightening, Carney pointed to the lack of a “surge in investment” due to “Brexit uncertainty”, hitting the rate of growth, productivity, and wage increases. Sterling traders got the message, sending the pound against the dollar—already ripe following a fresh post-referendum peak—accelerating lower. The rate has since lost about 5.7%.

August hike expected

Destabilized sterling has thereby reignited questions about the BoE’s reputation as an “unreliable boyfriend”, to use a phrase coined by a Labour Party member of Parliament’s Treasury Select Committee in 2014. If nothing else, the Monetary Policy Committee (MPC) now faces the added burden of credibly preparing markets and the public for the hike that Mark Carney said last month remained “likely” year. For this reason, polls of economists show a majority now expect the MPC to vote for a 0.25% rate rise at their August meeting.

Clues from forecasts

A first clue could come on Thursday. The Bank could trim inflation forecasts further but keep a projection that inflation would be slightly above the 2% target in three years’ time. As such, a rate rise would still be required this year in order to reach that target over the "more conventional horizon" Carney envisaged in February. The Bank’s annual growth target averaging 1.75% over the next three years could see a similar trim. MPC voting, as a minimum, would need to remain static at 7-2 in favour of keeping the Bank rate at 0.5%, as in March, to avoid unsettling market expectations further. Chances that additional dissenters appear on Thursday appear to be low, after Ian McCafferty and Michael Saunders became the first to vote for a hike in March as they were in 2017.

Thoughts on GBP/USD technical price chart

The sterling/dollar’s next significant downside target after it broke a string of strongly corroborated prior support levels, lies around $1.3308, a visible pivot for price between September-December 2017. Support was confirmed there before GBP/USD set off to post-Brexit vote peaks. Support was also observed at $1.3455 in January. In the event of hawkish surprises, initial notable resistance is best predicted where cable recently saw (failed) support between January and late April—near $1.3835-1.3711.

Technical analysis chart: GBP/USD – daily intervals

Source: Thomson Reuters and City Index

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