The Bank of England Preview: Three things to watch in BoE statement

After raising the Bank rate to 0.75% in August, the Bank of England is set to remain in a wait-and-see mode waiting for further Brexit deal development with no deal scenario possibly triggering inflationary scenario.
Stronger than expected UK wage growth is unlikely to alter the outlook for the monetary policy with next rate hike expectedly in May 2019.
FX traders should watch for the MPC voting pattern and the monetary policy statement mentioning Sterling´s value for clues.

Mario Blascak, PhD Independent Analyst

With the Bank of England´s nine-member Monetary Policy Committee (MPC) is likely to opt for the wait-and-see mode in September after hiking the Bank rate to 0.75% at the beginning of August even with the fresh wave of Brexit deal optimism and positive macro data flooding the news recently. Next rate hike is currently priced around May 2019 Inflation Report.

The MPC will be meeting for the first time with the new member replacing Ian McCafferty, an academic in productivity growth professor Jonathan Haskel. Even with inflation and wages picking up slightly in recent reports, the data are seen not enough to alter the expectations of the unanimous voting pattern for both the Bank rate vote and asset purchasing vote. FX traders should see breaking this pattern in members voting for a rate hike as Sterling positive.

From the point of view of policymakers at the Bank of England, the risk of no Brexit deal is still imminent, regardless of the recent headlines from the European Union chief Brexit negotiator Michel Barnier or/and the European Union President Jen-Claude Juncker that the Brexit deal is achievable within 6-8 weeks. The news moved the Pound strongly in the last couple of days, but from the Bank of England perspective, until all in Brexit deal is agreed upon, nothing is really done. Therefore the MPC is likely to repeatedly voice the concerns over the Brexit risk, especially the scenario of no-deal Brexit, that could turn increasingly worrying in terms of inflation rising above the targetted levels as a result of Sterling´s underperformance.

The Brexit risk was repeatedly voiced as the major source of the risk for the UK economy during the August Inflation Report parliamentary hearing and it is expected to remain the key risk also in September´s MPC statement. Brexit uncertainty is likely to be the main reason why the UK Chancellor Hammond extended the term for Mark Carney as the Governor of the Bank of England until January 2020.

Apart from the voting pattern of the MPC on the Bank rate, FX traders should also be aware of MPC mentioning Sterling's value in its statement for direction. The latest Inflation Report hearing in the UK parliament saw Governor Mark Carney indicated that Sterling is undervalued. The spot rate of Sterling against the US Dollar increased since then on Brexit positive headlines but the policymakers might refer to some kind of average and explicit mention of Sterling being undervalued should kick it higher.

Author

Mario Blascak, PhD

Independent Analyst

Dr. Mário Blaščák worked in professional finance and banking for 15 years before moving to journalism. While working for Austrian and German banks, he specialized in covering markets and macroeconomics.

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