UK: BoE and employment data to take centre stage - BBH

The Bank of England meets in the week ahead, but the decision to stand pat will likely be unanimous, according to analysts at BBH. 

Key Quotes

“A dissent would strengthen ideas of hike in Q2.  The market is pricing in about little more than a two-thirds chances of a hike in May, and the odds have drifted higher over the past couple of weeks.  While Carney is unlikely to dissuade the investors from such expectations, the tightening that the central bank seems determined to provide is taking place as the economy is slowing.”

“The economy peaked (year-over-year GDP) in 2014 a little above 3%.  The market expects 1.5% growth this year.  Price pressures appear to have peaked last year, and the February CPI, which will be reported before the BOE meeting, is expected to ease to 2.8% from 3.0%.  Prices are proving to be stickier than many thought, after the past depreciation of sterling dropped out of the year-over-year comparisons.”

“Employment and earnings data will also be reported before the BOE meeting.  The UK is widely understood to be near full employment.  Average monthly earnings (3-months year-over-year) rose at 2.5% pace throughout Q4.  The median forecast calls for a 2.6% increase in January (data is reported with an extra month lag), which would be the highest since November 2016, which itself was the highest since September 2015.”

“The higher nominal wages are not fueling consumption.  February retail sales, which will be reported a few hours before the BOE’s decision next week, are trending lower.  They are expected to have risen by 1.2% in the year through February (excluding petrol). Retail sales averaged 2.1% last year and was 3.5% last February.   The logic may be that driving down inflation will boost the purchasing power of households.  The increased demand will offset the impact higher rates.  We are suspicious.  Due the prevalence of variable rate mortgages, higher interest rates feed through the households relatively quickly.  Pro-cyclical monetary policy may aggravate the slowdown.”

“This could be a big week for Brexit.  The EC is to decide if sufficient progress has been made on the transition period that the next and last chapter—the new relationship—can be addressed. We remained concerned that it might not be the macro issues that may prove the thorniest, but rather two issues that the UK government may not have under-estimated, the Irish border and Scotland and Wales reluctance to agree to the Withdraw Bill on grounds that it would erode their local autonomy.”

“Sterling may respond according to the EC’s decision, with a delay being negative.  However, even if negotiations go forward, by the time they are launched, there will be less than a year to do what would seem to normally take a couple of years.  Looking further out, a poor showing for the Tories in the local elections (May) could spur a leadership challenge, which could disrupt negotiations.”