By RanSquawk
Bank of England Monetary Policy Decision, Minutes and Quarterly Inflation Report at 12:00GMT (07:00EST), Press Conference with Governor Carney at 12:30GMT (07:30EST)
- Bank of England expected to keep monetary policy instruments unchanged; vote split expected to be 9-0
- Markets looking for any hints that a rate hike could come as early as May
BACKGROUND
The Bank of England is expected to keep its policy instruments on hold at this meeting. All analysts surveyed by Reuters expect the bank rate to remain unchanged at 0.50%, the Gilt QE program unchanged at GBP 435bln and the Corporate Bond QE program unchanged at GBP 10bln. The vote split is expected to be 9-0 for no change in interest rates although two of 21 analysts expect two people to vote for a hike (likely McCafferty and Saunders) while one analyst surveyed expects one to vote for a hike.
With no change expected, markets will be looking for comments in the Quarterly Inflation Report (QIR) or the minutes for any signal that a rate hike could come in May (the next month when the QIR is released). Markets are currently pricing in just a 47% chance of a hike at the May meeting which could change depending on what the BoE signals. Berenberg has identified three tools it could employ to prepare the markets for a hike in May:
- Upgrade economic forecasts – Projecting inflation >2% over the forecast horizon
- Have some members vote for rate hikes – Most likely McCafferty and/or Saunders
- Comment on market pricing directly – Ahead of the November rate hike, the BoE said: “Monetary policy could need to be tightened by a somewhat greater extent over the forecast period than current market expectations.”
If the BoE deploys one or a number of these tools it could be seen as a hawkish move, although they may want to hold off signalling a move is coming in May, given the uncertainty surrounding Brexit negotiations and the recent softness in some data.
Markets should also be looking out for details regarding the reinvestment from maturing bonds held under the current QE program. RBC note that the Bank of England currently holds GBP 15.8bln of the Mar’2018 bond which expires on March 7th. They expect reinvestment operations to commence on 12th March and continue for four weeks, implying an average of circa GBP 4.6bln of purchases per week, to be split over three buckets (3-7y, 7-15y, and +15y). Back in November, Carney said that the BoE would prefer the Bank Rate to be higher before adjusting the QE program
DEVELOPMENTS SINCE THE PREVIOUS MEETING
Growth, Inflation, Labour Market and other data
The preliminary reading of Q4 GDP was stronger than expected, printing at 0.5% Q/Q, up from 0.4% in Q4. This took the Y/Y rate to an unremarkable 1.5% as UK growth lags that of its developed peers. The disappointing growth looks set to continue as the recent PMI surveys suggest GDP growth of under 0.3% Q/Q in Q1, compared to 1.0% for the Eurozone as a whole. Obviously this data covers just one month of the quarter but it is clear that the UK is lagging behind its European neighbours.
Inflation continues to track above target although declined to 3.0% in December from 3.1%. In November, the BoE had said that inflation was near its peak and was then expected to fall back. So far, they appear to be correct after the slowdown in December although Governor Carney still has to write a letter to Chancellor Hammond explaining why inflation is over 1 percentage point away from the BoE’s target of 2.0%, this will be published alongside the decision. Back in January, Carney said he still expects inflation to remain above 2% in the near future.
The most recent labour market data from the UK was relatively strong: employment rose to a record high and average earnings (excluding bonus payments) rose 2.4% Y/Y. However, the timely claimant data was less favourable as the claimant count rose by 8.6K, above the expected 5K and up from 5.9K in November.
Elsewhere, December retail sales were soft (although this follows a strong November as consumers front loaded Christmas purchases) and the housing market has shown further signs of slowing. Mortgage approvals fell to their lowest level in almost five years in December, although October and November were strong ahead of the rate hike in November.
Brexit
Since the November meeting, the UK and EU appeared to make a breakthrough in Brexit negotiations. The two parties reached a deal on citizens’ rights, the border with Ireland and the size of the divorce bill, meaning talks can move onto the next stage – the future trade arrangements and a transitional period. Talks on the transition agreement continue this week and markets will be looking for comments from the BoE on how they view the recent developments. In November, the BoE said that a transition period would reduce the chance of a “disorderly Brexit” which they could echo this time around and would be seen as a relatively neutral stance.
MPC Rhetoric
The Monetary Policy Committee has been relatively quiet since the last meeting in December with only Governor Carney, Saunders and Tenreyro hitting the wires. Carney sounded relatively upbeat, suggesting that wages are showing signs of picking up and that they have seen a bit of a pick up in growth. Carney also added that the inflation pass through from the exchange rate shock still has further to go and expects inflation to remain above target in the near future.
Tenreyro, one of the newest members on the MPC, said she saw “ample time” before the BoE would need to raise rates again and expects only a couple more rate hikes over the next three years. Whether “ample time” means as early as May is up for debate but it appears unlikely that Tenreyro will be voting for a hike at this meeting.
Saunders speech was full of mixed messages and contradictions. On one hand, he said that interest rates will likely need to rise over time while on the other hand stated that Brexit could push BoE policy in either direction.
CURRENT FORECASTS
The BoE currently forecasts inflation to remain above target over the forecast period although drift down towards 2.0% by the end of 2020. Barclays note that the new forecasts will have to incorporate significantly different exchange rates and oil prices. The pound (GBP) has appreciated approximately 1.4% against all currencies since the November report and Barclays estimates that if that was sustained then it will subtract 0.1ppt from inflation in 2018. On the other hand, oil prices have been mostly resilient to increasing US production and have risen approx. 10% since November, which Barclays estimates will add 0.1ppt to inflation in 2018.
Regarding growth, Berenberg notes that the BoE identified a “speed limit” that the UK economy can manage without generating excess inflation, which stands at just over 1.5%. If the BoE raises their growth forecasts higher above this limit than the current 1.7% then it might be seen as further preparing the market for another rate hike.
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