The Bank of England Preview: With rates seen taking a nap in May, Sterling is set to suffer

• The Bank of England is widely expected to keep the Bank rate on hold in May after the streak of disappointing macro data and with the Brexit uncertainty still haunting.
• The policymakers are likely to voice the Brexit uncertainties and low productivity growth as main risks to the outlook.
• The recent depreciation of Sterling reflects shifting divergence in the outlook for UK interest rates. 

The nine members strong Monetary Policy Committee (MPC) of the Bank of England (BoE) is expected to stand pat on the Bank rate in May leaving its outlook for the policy rate unchanged with three rate hikes warranted until 2020. With two arch-dissenter- Ian McCafferty and Michael Sauders - the vote decomposition is expected to stay unchanged from March at 7-2.
 
At the same time, the BoE is going to publish its May Inflation Report in which the short-term prediction for both growth and the inflation are expected to be downgraded as the effect of Sterling’s appreciation weighs on inflation while the UK economy exhibited unexpectedly strong deceleration in economic activity during the first three months of this year.

The shift in the outlook for the Bank rate changes in the environment of supposedly lower inflation and growth from current three rate hikes until 2020 will decide upon Sterling’s future with immediate effect. 
 
The  Bank of England Governor Carney admitted in April that “we have had some mixed data in the UK.” Although Carney refrained from being particular, his comment was a trigger of a massive re-evaluation in market expectations of the interest rate hike in May.  
 
While hard data like inflation and the wage growth came in slightly below expectations, the forward-looking PMI decelerated sharply in March and April indicating economic slowdown confirmed by lower-than-expected the first-quarter GDP. While some of the hawkish market participants expect the Bank of England hiking rates in August, given the statistical chances it is  November rate hike that makes a move a sure shot. 
 
The economic soft spot in combination with the US Treasury yields rising above psychological 3.00% level and rising disputes within the UK government over the issue of the Irish border or/and the customs union with the EU after the Brexit transitions passes resulted in Sterling falling nearly 900 pips in last two weeks against the US Dollar since the April’s 22-month high of 1.4377.
 
This 6% depreciation might not have a direct effect on the BoE’s main inflation target immediately, but the correction in Sterling eventually prolongs the path of the UK inflation returning to 2% target. 
 
While the UK needs stronger Sterling to dilute the adverse effect of rising inflation as early as possible to keep the household demand and wages stable and if possible in positive territory in real, inflation-adjusted terms, the economic softness of late and scaling back of the rate hike expectations resulting in lower Sterling have the opposite effect. What matters the most, is the pace of the appreciation/depreciation as the foreign exchange market effect on wages and inflation are long-term, and a lot depends on the extent of the move and its persistence. 
 
The Bank of England will also issue its May version of the Inflation Report, which is the key policy document regarding the macroeconomic framework of the UK economy. The May Inflation Report is expected to review the short-term outlook for both inflation and the economic growth downwards while consistently keeping Brexit and lack of labor productivity growth as the key risks of its outlook.
 
The UK inflation, 2008-2018