While the Bank of England unanimously voted to keep interest rates and their quantitative easing programmes at current levels minutes from their September 14th meeting have not kept analysts from forecasting further action at the November meeting.
The Bank of England’s Monetary Policy Committee released their latest decision on interest rates and quantitative easing at 12:00 B.S.T, 11:00 G.M.T on September 15th.
At their meeting, held the day before, members of the committee opted to leave interest rates at 0.25% while deciding their corporate bond-purchase programme would seek an unchanged £10BN in debt and the gilt buyback programme would still target purchases of £60BN.
No changes were forecast by markets and it was always going to be the words held in the minutes that would be heavily scrutinised.
Our main takeaway are the numerous references to the economy outperforming their expectations:
"The package of measures announced by the Committee at its August meeting led to a greater than anticipated boost to UK asset prices."
"Since the August Inflation Report, a number of indicators of near-term economic activity have been somewhat stronger than expected."
"The near-term outlook for the housing market is less negative than expected and the indicators of consumption have been a little stronger than expected."
We do however note that Sterling is trading notably lower following the event, which suggests to us markets have walked away with another interpretation - that the Bank could yet announce further action at their November meeting.
While we believe the references to stronger-than-anticipated data don't necessarily warrant a November interest rate cut markets may have focussed on the mention of inflation in the minutes.
The Bank notes:
"Twelve-month CPI inflation remained at 0.6% in August, lower than projected at the time of the August Inflation Report, and well below the 2% inflation target.
"As the unusually large drags from energy and food prices attenuate, CPI inflation is expected to rise to around its 2% target in the first half of 2017, consistent with the August Inflation Report, albeit with the projection a little lower over the remainder of 2016 than had been anticipated in August."
Analyst Reactions, Another Rate Cut Coming
"Looking forward, we maintain our call of a November rate cut on the back of recession in H2 16. Indeed, if we are right in our forecast, then the November MPC will face a materially worse macro outlook than it currently expects.
"Faced with a GDP slowdown, we would expect MPC members to support a rate cut in line with the message so far. This call is however subject to some risks. In particular, data may continue to challenge our forecasts."
Johnny Bo Jakobsen at Nordea Markets:
Despite the run of better than anticipated economic data, the BoE dropped a clear hint that it will cut rates again in November, unless the economy performs better than expected. We continue to expect a 15bp rate cut in November, to 0.10%.
The anticipated weakening of the economy is still expected to be centred on business investment, where the backdrop of elevated economic uncertainty may put capital spending in doubt.
Data on investment outlays are among the least well measured components of UK economic accounts and the first estimates for Q3 – the first post-referendum quarter – will not become available until after the MPC’s November meeting.ch,
That the MPC is not as hasty as markets in ruling out the likelihood of further stimulus is not surprising to us. We would expect them to take a special interest in surveys of investment intentions over the coming months as they approach an update of economic projections in advance of the November Inflation Report.
Paul Hollingsworth at Capital Economics:
The MPC nudged up its forecasts for near-term GDP growth on the back of better-than expected economic data. However, these forecasts are highly uncertain at present and its general view of the economic outlook has not changed since August.
Indeed, the minutes still signaled that another rate cut is on the cards in November, if the “outlook at that time was judged to be broadly consistent with the August Inflation Report projections”. Accordingly, we, along with the consensus of economists and the markets, expect another cut in interest rates to 0.10% in November.
Alex Lydall at Foenix Partners:
Both McCafferty and Forbes noted that an expansion of QE was not necessary and that a reversal of recent rate changes would be too costly.
The mere fact that this was alluded too makes market participants wander, were the Bank of England a little too hasty in changing Monetary Policy measures this summer...?
What Analysts Were Expecting Going into the Event
Chris Turner at ING:
We expect the BoE to repeat the view that if activity emerges in line with the August inflation report, a rate cut to the lower bound (probably 0.10% in our view) will be required later this year. A better run of survey data has seen expectations of a 15bp rate cut in November drop to around 20%.
Today’s BoE meeting could put that back on the agenda and send EUR/GBP back to 0.8575.
Elsa Lignos at RBC Capital:
We know the Committee are cautious about placing too much weight on the survey indicators after the vote so it is clear they are taking a longer-term approach. On that basis, the prospect of a cut in Bank Rate in November remains our central case, as another move before year-end was mentioned as likely in the August MPC minutes if developments met expectations in the August forecast.
The September MPC meeting will be Michael Saunders’s first vote, and although his stance is unknown as he succeeds Martin Weale, the base case is for a 9-0 vote for no change.
Robin Wilkin at Lloyds Bank:
Comments from Governor Carney and his colleagues, who testified to the Treasury Select Committee last week, sounded confident that they had been right to ease policy aggressively in August.
While noting that the bulk of recent data had surprised to the upside, they still consider it early days and added that some of the improvement may be due to their prompt action. Overall, Governor Carney gave the impression that the MPC is still minded to loosen policy further, possibly in November.
For now, we believe they will be in wait-and-see mode, carefully assessing upcoming economic data, and as a result expect very little from today’s policy meeting.
We expect BoE to marginally tweak down its dovish tone this week, which should give a brief lift to the pound.We see little incentive for the MPC to be any more dovish than the market is already pricing in for the remainder of the year (around 7bp of cuts).
In fact, at this point the BoE may now even want to avoid raising the market's expectations for additional easing, given some of the glitches it has had with QE bond shortages and the uncertainty of whether it needs to save ammunition for a 'hard-Brexit'.
The MPC may take advantage of the stretch of recent data to paint a more balanced 'wait-and-see' message - perhaps by sounding encouraged by the pass-through of the recent rate cut or more concerned about the upside inflation risks.
While FX markets do not seem to be pricing in a particularly eventful or dovish MPC meeting, positioning remains highly short in GBP, and the pound has not hesitated to rally in response to local data and MPC guidance.
This week’s BoE meeting will be the key event risk for GBP and we expect no change in the MPC’s monetary policy settings. We look for unanimous voting in favour of the status quo for the current APF (9-0) but do believe that dovish Committee member Gertjan Vlieghe is likely to dissent and vote for a cut (8-1).
Moreover, we expect the minutes to echo the testimony of Governor Mark Carney and Committee members Jon Cunliffe, Kristin Forbes, and Gertjan Vlieghe to the Treasury Select Committee and think the MPC is comfortable with its recently announced easing package.
A confirmation of this and openness towards further easing, should downside risks to the economy materialise, will likely keep GBP/USD under pressure, in our view.