Bank of England Rate Decision Preview: The Fed example

The Bank of England is set to leave its base bank rate untouched at 0.75% when it publishes the minutes of its most recent Monetary Policy Committee meeting (MPC) and its rate decision on Thursday.  A unanimous vote is expected.

Governor Mark Carney and the members of the MPC have repeatedly said that they want to gradually increase the base rate which despite two 25 basis point hikes in the last two years remains at an all-time low.

The rate history of the BoE goes back to first half of the 19^th century and in that time the prior low was 2%, for considerable periods in the second half of the century and then again for most of the 1930s, 1940s and the first 18 months of the 1950s.

The BoE cut rates drastically in the financial crisis from 5.0% in September 2008 to 0.5% in April 2009 and though it began to normalize rates in the Fall of 2017 the advent of Brexit in the previous summer and its continual and inconclusive political wrangling and economic uncertainty prevented the bank from moving at a similar pace to the Federal Reserve, which also had a two years head start.

Reuters

Growth in the UK has also tailed off in the second part of this decade, dropping from 3.5% year over year in January 2015 to 1.3% this April.

Reuters

The UK inflation rate cooled in May to 2.0% annually from 2.1% in April and costs in manufacturing dropped to a three year low which might help convince the MPC that there is no urgent need to raise interest rates even though the overall case for normalizing them is clear. 

Brexit and the ebbing economic expansion have made it difficult for the bank to convince the market that is it serious in its desire to bring rates to a more historical plane.  That will again be the challenge in the MPC minutes and Mr. Carney’s press conference. 

Credit pricing indicates that, like in the US, traders believe a rate cut is the next likely move and with virtually no chance of a rate hike until at least mid-2020.

The mildly dovish FOMC statement on Wednesday and recent rate cuts by the Reserve Bank of Australia and the Reserve Bank of New Zealand and the comments by ECB President Mario Draghi that the bank could cut rates if needed have made Mr. Carney’s job all the harder.

The voting balance on the MPC will matter as well, if it is not unanimous and one or more members vote for a rate decrease it could galvanize markets to move forcefully towards lower rates.  

The pound has fallen 5% since early May on fears that Boris Johnson, the leading candidate to head the Tory Party and become the next Prime Minister, will lead the UK out of the EU with or without a deal on October 31.  Parliament and the financial community are strongly against a no-deal Brexit.

The Fed and ECB have given some comfort to the sterling which rose for the second day on Wednesday, but they have not helped Mr. Carney who is slated to leave the BoE next January.