No BoE action expected in October but rate hikes looming on the horizon

 
The BoE is holding its breath before kicking off with the monetary policy tightening cycle, which will most probably begin in the first quarter of 2015, even though some experts point to the end of this year, while others expect the first hike to come in the second quarter. Still, the central bank should stay on hold in October and only the Minutes of the policy meeting, out later this month, could cause some stir if they indicate that more MPC members voted in favor of a hike.

Information included in the Minutes "could help us understand how quickly interest rates could be hiked and what kind of macro data other BoE members need in order to become more hawkish," as Adam Narczewski remarks. Ilian Yotov believes that the number of MPC members in favor of an increase should remain at two this month, but if the hawks "are joined by one or two more, the market will begin to price expectations of a rate hike in the early part of next year."

Such an outcome would boost the pound but it is not very probable as "the latest Manufacturing PMI  showed activity at a 17-month low and inflation remains below 2% so it's very likely that a majority of MPC members will not vote for a rate rise until the early months of 2015," Alberto Muñoz suggests. "Therefore expect cable to trade sideways between 1.6000 y 1.6100," he adds.

Phil McHugh agrees that recent poor data should prevent the BoE from rising rates even to "after the general election next year." Only Yohay Elam allows for the possibility of a hike in 2014, "with the Scottish Referendum behind us and a potentially strong GDP report for Q3."

The BoE will announce its monetary policy decision on October 9 at 11:00 GMT. Below you will find the full forecasts of the contributing market experts.

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

"The upcoming BoE should not be surprising. I expect interest rates to remain at 0,5% and as most analysts expect, this situation should remain stable till the end of the year. The first possible interest rate hike could happen in the first quarter of 2015. The published statement is usually very short so I do not expect much from it. Much more we could learn on October 22nd, when the minutes will be published. We will see if others joined the two members of the BoE opting for interest rate hikes. This could help us understand how quickly interest rates could be hiked and what kind of macro data other BoE members need in order to become more hawkish. We have to note that the overall macro situation of the British economy differs from that of the Eurozone. GDP is increasing, PMI indices are above 50 points and inflation has been higher. Nevertheless, this growth has stabilized in the last couple of weeks. That is why the BoE members' discussion regarding interest rates should be interesting."

Yohay Elam - Analyst at Forex Crunch:

"The BoE is not expected to change policy in October. Inflation is still low and Carney hinted that this is still not the time. However, the moment is getting closer and the market is expected to get jittery around the announcement, especially as it is published separately from the ECB's one. A rate hike is currently on the cards for February, but with the Scottish Referendum behind us and a potentially strong GDP report for Q3, there still is a chance that the BoE will act already in 2014."

Ilian Yotov - Portfolio Manager at ATFX Currency Management:

"Two MPC members at the Bank of England have voted for a rate hike in August and September, and they will probably cast the same vote in October. While the majority of the nine MPC members are still not in a hurry to raise rates, if the two "hawks" are joined by one or two more, the market will begin to price expectations of a rate hike in the early part of next year. Such expectations should be supportive of the GBP, but with the latest U.K. data showing signs of a slowdown and the USD strengthening across the board, the pound sterling will probably see a dip into the $1.50's before it starts attracting more bids."

Phil McHugh - Senior Analyst at Currencies Direct:

"We expect the Bank of England to keep policy unchanged.  Although Mark Carney has warned of higher rates it is too early for the BoE to act.  With inflation slowing and wage growth stuck at an all-time low the pressure is off for now.  If inflation remains subdued and wage growth flat I would not expect to see the Bank move on interest rates even if we see strong economic growth persisting – this could push a rate rise back to after the general election next year."

Jameel Ahmad - Chief Market Analyst from Forex Time (FXTM):

"So much attention has been directed towards the continually weakening EU economic sentiment putting pressure on the ECB to add stimulus and improved US economic data raising optimism for a hawkish Federal Reserve bias, that we seem to have forgotten about the BoE rate decision.  I am in agreement with the majority that the BoE will leave policy unchanged this month and I am not expecting any substantial movement in the Cable, unless word emerges that a third member of the Monetary Policy Committee (MPC) voted for a rate rise. This would alert the bulls.
 
The major economic development traders should be keeping an eye out for in regards to fluctuations in the GBP, is indications that the UK economy could be impacted by the economic problems in Europe. BoE Governor Carney always implied that any UK rate rises would be “limited and gradual due to global economic headwinds elsewhere” and the Markit Manufacturing PMI missing expectations due to reduced demand from Europe was the driving point behind last week’s sudden 300 pip decline."

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

"As usually, I don't expect any changes in monetary policy next Thursday. Despite economic growth has been revised upwards and the Bank of England governor Mark Carney has said that "the point at which interest rates begin to rise is getting closer", the latest Manufacturing PMI  showed activity at a 17-month low and inflation remains below 2% so it's very likely that a majority of MPC members will not vote for a rate rise until the early months of 2015. Therefore expect Cable to trade sideways between 1.6000 y 1.6100."