Written by Gavin Pannu, MSTA, CFTe
Today’s BOE statement is called “Super Thursday” because the BOE will be simultaneously releasing its Monetary Policy Statement, Monetary Policy Committee meeting minutes and the May Inflation Report. Therefore there is a good chance that we’ll be seeing some major moves from the pound.
During the March BOE statement, the BOE announced no changes to its monetary policy so the Bank Rate was unchanged at 0.50% while the stock of government bonds and corporate bonds purchased were maintained at £435 billion and £10 billion respectively. The vote to maintain the bank’s balance sheet was unanimous. However, the vote to keep the Bank Rate steady was not since Ian McCafferty and Michael Saunders dissented by voting for a rate hike. The BOE even hinted at the possibility of a May rate hike when it noted that:
The May forecast round would enable the Committee to undertake a fuller assessment of the underlying momentum in the economy, the degree of slack remaining and the extent of domestic inflationary pressures.
From an 88% probability of a rate hike is now only an 11% probability, as a recent string of disappointing data and a dovish Carney speech have pushed back any rate hike to come in until at least August. This is seen as a delay in policy tightening and they are still expecting rate hikes through the year.
Most economists think that the BOE will likely vote to maintain its current monetary policy. In other words, no rate hikes are expected. The CPI only increased by 2.5% year-on-year, missing the BOE’s own forecast that CPI will increase by 2.8%. The economy only expanded by 0.1% quarter-on-quarter in Q1, which is the weakest reading since Q4 2012. IHS Markit’s manufacturing PMI, construction PMI, and services PMI reports hint that the U.K. economy continued to lose momentum.
BOE Governor Carney said in an April 19 BBC interview that the U.K. has had mixed data recently, which implies that the BOE is not too happy with the recent data. Carney also said during the BBC interview that BOE officials will discuss monetary policy in May while conscious that there are other meetings over the course of this year, which implies that the BOE is not comfortable with hiking in May.
On a positive note, CPI may have been weaker-than-expected, but the fact remains that CPI has been and is still above the BOE’s 2.0% inflation target. The U.K.’s latest jobs report revealed that the jobless rate in the three months to February was at 4.2%, which is a 42-year low. The jobs report also revealed that average earnings grew by 2.9% in February. Despite noting the mixed data during the April 19 BBC interview, Carney still said that the market should prepare for a few interest rate rises over the next few years.
Currently, interest rates are expected to stay unchanged. The market will focus on whether the BOE will likely downgrade its growth and inflation forecasts and aside from the BOE’s tone and forward guidance, this could lead to further selling pressure. If the downgrade is only slight and if BOE stresses that the recent bout of weakness is only temporary, then that may help to revive rate hike expectations and may also push the pound higher. If the downgrades are large enough that the market begins to think that the BOE won’t be hiking this year, or if the BOE presents a bleak outlook, then the pound is likely to continue the selling pressure. There is also a consensus that Ian McCafferty and Michael Saunders will likely vote for a rate hike again which may push the pound higher but if they are no longer hawkish this could lead to a sell off. If other MPC members also vote for a hike this may lead to bullish momentum.