BoE to remain in standby mode at April meeting

We are still about one year away from the first Bank of England rate hike, the analysts taking part in the forecast report agree, adding that this month the central bank will keep policy unchanged.

Bill Hubard allows for the possibility of the central bank starting to tighten policy earlier, but he believes that  "ongoing uncertainties over the external demand backdrop, weak average earnings growth that will take time to recover, and an instinctive bias to err on the side of starting to remove accommodation later rather than earlier given the perceived headwinds and risks to the recovery, will conspire to prevent such an outcome." 

This month even the threat of a housing bubble forming in the UK shouldn't push the UK central bank towards action, as the Monetary Policy Committee members "believe that regulatory changes rather than monetary policy have to regulate this problem," in the words of Adam Narczewski. Perhaps the next BoE Inflation Report will contain some "stronger language" on the issue, Yohay Elam suggests, but nothing more for now.

Last month UK Chancellor George Osborne announced the appointment of two new deputy governors, Nemat Shafik and Ben Broadbent, and a chief economist Andy Haldane. Apart from the fact that Shafik is the first woman in a senior role at the central bank since 2010, the changes were not really revolutionary and are not expected to change the current course of monetary policy.

Steve Ruffley comments: "What good will come from going back with tradition and bringing in 3 of the old guard? Very little I feel."

Finally, if the BoE decides to include in its post-meeting statement some information about future moves, "favoring the relax in QE or warning of a possible rates rise," as Alberto Muñoz speculates, this would "benefit the pound which could retest the strong resistance in the 1.6750 - 1.6800 area." 

The BoE will announce their monetary policy decision on April 10 at 11:00 GMT. Below you will find the full forecasts of the contributing economists.

Bill Hubard - Chief Economist at Markets.com:

 "We continue to expect that the first 25 bps hike in Bank Rate will be approved by the MPC in February 2015, by which time stronger investment and healthily positive real incomes should provide sufficient protection against the possibility that tighter policy and higher borrowing costs dampen consumer spending and confidence. There is a possibility that the MPC decides to act sooner than this, but we believe ongoing uncertainties over the external demand backdrop, weak average earnings growth that will take time to recover, and an instinctive bias to err on the side of starting to remove accommodation later rather than earlier given the perceived headwinds and risks to the recovery will conspire to prevent such an outcome.

In addition, it is important to bear in mind that the MPC will be going through several personnel changes over the next 5 months, which make it more likely to us that the consensus view of the Committee will take longer to evolve than it might have done with a settled membership.

Assuming the governor sticks firmly over the coming months to the communication strategy he unveiled at the February QIR (policy tightening remains some way off, and when it does begin rate hikes are expected to be gradual and limited), it seems unlikely that the collegiate view of the Committee will deviate far from that, until either the governor changes his assessment or the new members become sufficiently established to disagree with him if their views start to diverge materially from his." 

Steve Ruffley - Chief Market Strategist at InterTrader.com: 

"The housing bubble is like a car crash currently happening in slow motion. We have learnt nothing from the last credit crunch. We have done very little to address the underlying issues of property ownership, and over ownership. Having re capitalised the banks, instead of them investing in business they still seems to think that mortgages are a reliable source of income. Who can blame them? It’s down to the BoE and Mark Carney to put pressure on them to do otherwise. They have simp0ly not enforced this.
 
We have still have to realign the nations obsession with getting on the property ladder. With student debts, poor job prospects it’s only  the prospect of inheritance that can get a large percent of the population on the housing ladder now. People have to start realising this. Three is light at the end of the tunnel in some respects as a crash is inevitable. All those who think London is immune to this are wrong. It will start at the top and filter down. What goes up will come down, these are the rules of history. I may take 1 years it may take 10, but it will happen. The gap between the rich and poor is unsustainable, people are laden with debt and a 0.25% rate increase will be the straw that breaks the nations’ back.
 
The addition of two new deputy governors and a chief economist are laughable. We have had nothing new or decisive since the huge break with tradition of employing a ‘foreigner’ as governor. What good will come from going back with tradition and bringing in 3 of the old guard? Very little I feel."  

Yohay Elam - Analyst at Forex Crunch:

 "The BOE is not expected to act in its April meeting. The falling level of inflation and the pause in the drop of the unemployment rate give the Bank some breathing space before eventually hiking the rates in around a year from now. Regarding a potential housing bubble, we may see stronger language about this in the May Inflation Report, but action isn't likely to come so fast. The new appointments are likely to follow the current policy line which is leaving the current level of stimulus unchanged. More stimulus could fuel a housing bubble and make an exit harder, and less stimulus could risk raising unemployment and allowing inflation to fall into dangerous territory."

Adam Narczewski - Financial Analyst at X-Trade Brokers, XTB:

"I do not expect much from the upcoming BoE monetary policy meeting. The status quo should be kept. The BoE will rather not take any action to prevent the forming housing bubble. They believe that regulatory changes rather than monetary policy have to regulate this problem. As for the new members of the BoE team:Ben Broadbent currently is an external member of the MPC so his nomination for deputy governor is not a big surprise. Also, the addition of Nemat Shafik (first woman in a long time) and Anthony Habgood are not revolutionary or surprising so I do not expect any big changes in monetary policy in the upcoming months. Rather than people, the economic situation of the UK will be the determinant (as it should be) of any possible action taken by the MPC in the future." 

Alistair Cotton - Senior Analyst at Currencies Direct:

"I think the MPC views interest rates as a blunt instrument in trying to prevent bubbles forming, so it will fall to the Prudential Regulation Authority to introduce measures aimed at preventing housing market excess. Interest rates also act with a considerable lag and will impact the wider economy, not just the housing market, so more focused measures aimed directly at bank and building society lending for property purchases, which comes under the PRA, would probably be more successful at containing prices.
 
However, given how difficult it is to identify a bubble as it inflates, the Bank of England is necessarily cautious about causing undue harm to the economy. It might think that in the face of more innovative finance models, restricting bank lending from traditional lenders, like banks and building societies, might just push funding to firms less-qualified to be making loans. But the biggest reason that the bank of England will not act to curb house prices this year is we have a general election next May, and a Chancellor trying to get re-elected on the back of an economic recovery built on a housing boom.
 
The beefed-up Bank of England has the MPC, PRA and financial stability board now under one roof, so in theory the bank can use all of these levers to complement existing monetary policy. The implications for the MPC are that it has a greater toolkit to achieve its aims, which should mean better ability to hit its target of medium-term monetary stability. Whether the addition of the PRA and MSB will give the necessary tools the Bank needs to hit its target in an increasingly integrated world is unclear at this stage, but the MPC is now under increasing pressure to deliver a stable environment for the continuing economic recovery."

Valeria Bednarik - Chief Analyst at FXStreet:

"As usual, the BoE is hardly expected to bring something new to the table, when it comes to economic measures. But there's a new risk for the economy surging in the UK: the increasing momentum in house prices that already rose over 10% this year. The pick up in prices and therefore in mortgage demands threatens a new property bubble. And although the BOE has expressed its concern and tip that they are ready to act if needed, the fact is that that would hardly happen this month."

Alberto Muñoz, Ph.D. - Forex Analyst at FXStreet:

"Probably we won't have any new development in UK monetary policy but if I were Mr. Carney I would start preparing the market for the end of the QE as well as for an interest rates rise in the next months. Therefore I would not discard some comments from the BoE after the meeting or in the next weeks. Carney is also cleaning the Bank of England image after George Osborne appointed two new deputy governors which is coherent with setting up some changes in the monetary policy in the upcoming months. Anyway any comment favoring the relax in QE or warning of a possible rates rise would benefit the pound which could retest the strong resistance in the 1.6750 - 1.6800 area."