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Bank of England Ahead: Analysts Tell us What to Look for

- Bank of England to leave its interest rate unchanged at 0.50%.

- Markets will look for confirmation a rate hike is coming in May.

- Analysts expect BoE to play it cool but GBP to remain on the offensive.

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The Bank of England will announce its latest interest rate decision at 12:00 pm Thursday, March 22 while providing an updated outlook for the economy and monetary policy in the UK.

Economists expect the BoE to leave the base rate unchanged at 0.50% but markets will look to the accompanying statement and vote split among Monetary Policy Committee members for clues as to when the next rate rise is likely to come.

Pricing in interest rate derivatives markets, which enable investors to protect themselves against changes in interest rates while providing insight into monetary policy, suggested Wednesday morning there is around an 85% chance of an interest rate rise at the BoE’s next meeting in May.

The May rate rise is therefore a done deal, and what will matter for market is the langauge contained in the minutes as they relate to interest rate rises beyond May. Any commentary that nurtures hopes of further rate rises in 2018-2019 will likely have a substantial positive impact on Pound Sterling exchange rates.

However, with data having been a little underwhelming of late there is a risk that the Bank maintains a cool tone on future rate rises so there could well be disappointment for Sterling bulls. We have heard from a number of institutional analysts as to what they believe we should expect from the Bank, here are their views:

 

Analyst Views:

Ned Rumpeltin, European head of FX strategy, TD Securities

"There is unlikely to be any notable change in the MPC's communication, which could surprise market participants looking for a repeat of last September's message when the BoE set up its November rate hike.

"We expect a hike in May, but the MPC is unlikely to explicitly signal this any more strongly next week, keeping a healthy dose of skepticism in markets.

"We expect EURGBP to retain a heavy tone into the meeting. We remain short the cross and look for a break below 0.8687 in the weeks ahead.

"A key indicator for the MPC at the moment is wages. In recent months, an improving unemployment rate has started to put pressure on labour markets." 

 

Paul Hollingsworth, UK economist, Capital Economics:

"With no Monetary Policy Committee (MPC) meeting scheduled in April, its meeting on 22nd March will be the last opportunity for the MPC to lay the groundwork for another interest rate hike in May.

"It looks unlikely that we will get a repeat of the “in the coming months” guidance that the Committee introduced in the Minutes of September 2017’s meeting – signalling in advance the 25bp hike which came in November. After all, that guidance was included at a time when financial markets had not been revising up expectations in response to better macroeconomic data, or the MPC’s hints that more tightening might be required.

"What’s more, since February’s Inflation Report, the economic data have been quite mixed. GDP growth in Q4 was revised down unexpectedly, and the hard data for January suggests the economy got off to a slow start to this year. That said, the Markit/CIPS PMI surveys are still consistent with quarterly GDP growth broadly in line with the MPC’s 0.4% forecast in Q1.

"Against this mixed backdrop, markets have left their expectations for the pace of tightening over the next few years broadly unchanged since February’s Inflation Report.

"We don’t think that the MPC will provide any strong signals next week about a May hike... But the language is likely to leave the door open to another hike in May, so long as the economy holds up broadly in line with the MPC’s forecasts."

 

Robert Wood, Kamal Sharma, Bank of America Merrill Lynch

"We expect the Bank of England to stay hawkish at Thursday's policy meeting. We still assume the BoE will hike rates in May and it will continue to signal that. We expect a 9-0 vote to keep rates on hold, though there is a chance of a vote or two for hikes.

"This call has nothing to do with the data, which have disappointed. Unemployment rose, we are tracking just 0.2% QoQ GDP growth and inflation downside is mounting.

"If we based our BoE call on the data, we would be looking for a more dovish statement. But the BoE's guidance to expect earlier and faster hikes means we have to down weigh the data. That said, we would add a note of caution, given how much is being read (85% priced for May hike now) into the following words.

"The Committee also judged that, were the economy to evolve broadly in line with the February Inflation Report projections, monetary policy would need to be tightened somewhat earlier and by a somewhat greater degree over the forecast period than anticipated at the time of the November Report, in order to return inflation sustainably to the target." - Minutes of February monetary policy meeting

"In some ways, the main event for GBP has already passed, with an agreement on transition announced on Monday...We continue to believe that transition allows GBP/USD to trade sustainably above the 1.40 level...The resilience of the Pound to softer headline inflation has been reassuring."  

 

Philip Shaw, Economist, Investec 

"While we are not convinced that current pay trends necessarily threaten the inflation target further ahead, the MPC’s hawkish assessment looks set to remain in place.

"February’s CPI data showed inflation declining to 2.7%, below the BoE’s short-term staff estimate of 2.9%. However this seems unlikely to dent the MPC’s view of medium-term inflation prospects, nor its collective judgement on the need for further tightening.

"We would not be surprised to see some dissent on rates, with one, or even perhaps two, members backing an immediate 25bp hike in the Bank rate. Likely candidates are Ian McCafferty, Michael Saunders or Andy Haldane. This should smooth the way for the committee to make a move on rates in May, as long as this is still warranted by the economic data.

"Beyond the next move, our baseline case remains that the committee will increase rates again in November and then in May next year.

 

Petr Krpata, FX strategist, ING Group

"We look for GBP’s focus to shift back to UK economic fundamentals.

"A Brexit transition deal is one element of GBP’s bullish trifecta this week; if all the cards were to fall perfectly into place – and we also see a status quo hawkish Bank of England policy message and constructive UK wage inflation data today – then we wouldn’t rule out a further move up in GBP/USD towards the year-to-date highs around 1.4250-1.4300.

"With markets looking for headline wage growth at 2.6% YoY – any positive surprise would vindicate the Bank’s inflation-driven tightening bias."

 

Lee Hardman, currency analyst, MUFG

"Today’s average weekly earnings data ... signal the best period of wage growth since 2015. Reports that key NHS employee unions have reached a deal with NHS Employers for a wage increase could have significant implications for overall public sector pay. The MPC will no doubt have taken note ahead of today’s wage data.

"Yesterday’s weaker inflation does not change our view of a May rate hike by the BoE and therefore we doubt Pound selling will be sustained for long."

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