The RBNZ ain’t the only one with a monetary policy decision this week since the BOE will also be announcing its monetary policy this Thursday at 11:00 am GMT.
What’s more, this Thursday’s BOE statement is a so-called “Super Thursday” because the BOE will be simultaneously releasing its monetary policy statement, Monetary Policy Committee (MPC) meeting minutes, and the May Inflation Report. There’s therefore a good chance that we’ll be seeing some major moves from the pound.
What happened last time?
- The BOE voted to keep the Bank Rate at 0.50%
- Vote to maintain the Bank Rate was not unanimous
- Ian McCafferty and Michael Saunders voted for a rate hike
- BOE still had a hiking bias
- BOE open to the possibility of a May rate hike
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 right then and there.
And according to the BOE’s meeting minutes, “These members noted the widespread evidence that slack was largely used up and that pay growth was picking up, presenting upside risks to inflation in the medium term.”
Other than that, the BOE also confirmed its hiking bias since “Data released since the February Report appeared to have few implications for the medium-term outlook and were broadly consistent with the MPC’s views set out in that Report.”
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.”
Anyhow, the market didn’t expect Ian McCafferty and Michael Saunders to vote for a rate hike right, so the pound’s initial reaction was to jump higher.
However, everything else was pretty much within expectations, including the BOE’s hint about a possible rate hike in May.
Follow-through buying was therefore nonexistent and the pound began to trade broadly lower after the initial knee-jerk reaction, likely because of profit-taking since the pound had already been climbing steadily higher in the days ahead of the BOE statement.
What’s expected this time?
- No change in monetary policy expected
- Ian McCafferty and Michael Saunders expected to vote for a rate hike
- BOE expected to keep its hiking bias
- BOE expected to downgrade its CPI and growth forecasts
Most economists think that the BOE will likely vote to maintain its current monetary policy. In other words, no rate hikes are expected this Thursday.
And here are 6 reasons why the BOE will likely keep monetary policy steady.
- The U.K.’s headline CPI only increased by 2.5% year-on-year, missing the BOE’s own forecast that CPI will increase by 2.8%, as reported in the BOE’s February Inflation Report.
- The U.K. economy only expanded by 0.1% quarter-on-quarter in Q1, which is the weakest reading since Q4 2012 and is a severe disappointment since the BOE was expecting a 0.4% increase, as detailed in the BOE’s February Inflation Report.
- Markit’s manufacturing PMI, construction PMI, and services PMI reports hint that the U.K. economy continued to lose momentum in in Q2.
- The aforementioned PMI reports also noted that inflationary pressure continued to ease in April, which will likely translate to even weaker CPI down the road.
- 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 too comfortable with hiking in May.
Even though the BOE is not expected to make a move this Thursday, most market analysts also think that the BOE will likely maintain its hiking bias.
And here are 4 reasons why the BOE will will likely keep its hiking bias.
- 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 regular weekly earnings (bonuses are excluded) actually grew by 2.9% in February, which is the strongest reading since July 2015.
- 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.”
Moving on, there’s also a consensus that Ian McCafferty and Michael Saunders will likely vote for a rate hike again.
Saunders is expected to vote for a rate hike again because he said in an April 20 speech that:
“I believe the economy no longer needs as much stimulus as previously.”
“Gradual does not imply that the MPC can only raise rates at a very low frequency, such as once per year. Nor does gradual mean that the MPC cannot tighten faster than markets price in.”
McCafferty, meanwhile, noted during an April 10 Reuters interview that:
“We [the BOE] shouldn’t dally when it comes to tightening policy modestly.”
It should be noted that McCafferty said that hawkish comment before the disappointing CPI report was released. But as mentioned earlier, CPI remains above the BOE’s 2.0% inflation target.
And again, the minutes of the March BOE MPC meeting showed that McCafferty and Saunders voted for a rate hike because:
“These members noted the widespread evidence that slack was largely used up and that pay growth was picking up, presenting upside risks to inflation in the medium term.”
And as noted earlier, the jobless rate is at a 42-year low while regular wage growth has been steadily rising, which supports their hawkish view.
Other than that, market analysts also think that the BOE will likely downgrade its growth and inflation forecasts. And aside from the BOE’s tone and forward guidance, it’s likely that traders will have their sights on these.
If the downgrades are only slight and if the BOE stresses that the recent bout of weakness is only temporary/transitory, then that may help to revive rate hike expectations and may also push the pound higher.
Conversely, 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 get hit by selling pressure.