Three things to watch on BoE 'Super Thursday'

Tomorrow marks the fourth time since June’s Brexit vote that the markets get a ‘Super Thursday’ from the Bank of England. This event – its decision on interest rates; the minutes of the monetary policy committee’s meeting at which the decision was reached; and the quarterly inflation report, which gives its latest view on the state of the UK economy - will be key for markets in gauging the short-term direction for monetary policy and sterling.

In looking back at the last meeting in February, the Bank of England left interest rates and QE unchanged, as expected but essentially moved from a dovish bias to a more neutral one. The committee substantially upgraded its growth forecasts demonstrating how wrong it got its forecasts. However, despite this growth upgrade, the markets were slightly disappointed as inflation estimates were trimmed.

Here’s 3 things to look for in this meeting and forecasts:

High Inflation

The Brexit vote's biggest impact has been on the sharp drop in sterling which has pushed UK inflation to three year highs of 2.3%. This overshoot above the BOE target of 2% is expected to push higher still over the course of the year. In the February report, the BOe forecast consumer prices to peak at 2.7% in 2018, but since then oil prices have dropped substantially and sterling has recovered. A weak pound is of course beneficial for exports and inflation, but as wage growth has slowed down rising inflation will likely undermine consumer expenditure; one of the major drivers of the econonmy. Interestingly, there was market talk today that Carney may be tempted to talk up the inflation impact.

Low Growth

The UK economy started the year on the backfoot with GDP slowing worse than expected to its weakest pace in 12 months. The most recent figure of +0.3% is more than half the +0.7% pace advance at the end of last year. It is also most notably below the +0.6% forecast from the BOE in the first quarter.

The latest survey data on the other hand has showed some positive momentum carrying through to Q2 with resilient consumer confidence figures. Whether negative real wage growth coming in the next few months hits spending growth more aggressively will be key for GDP prospects and Carney’s handling of this will be fascinating. Indeed, we called this his ‘hire-wire’ balancing act at the February meeting.

Interest Rate Hints

After one (departing) policymaker voted for a rate rise in March, Carney is expected to keep a measured tone as there is no reason at this stage to start a more hawkish rhetoric, especially after the modest Q1 growth figures. In addition, the June general election may have an extra bearing on the Committee's reasoning. February saw Carney talk about the 'twists and turns' of the Breixt journey and it is most likely that monetary policy will be kpet steady until any negotiation deal clarity is evident. 

For us, the impact on sterling wil be key. Cable spiked higher earlier today to 1.2988 on the market chatter of possible hawkish bias by Carney. This seven month high comes after a series of bullish flag breakouts seen since the 300 point plus move after the election announcement. We note that the directional move of this last pattern was modest which means the city chatter will need to be heard tomorrow if we are to break through the 1.30 psychological barrier. We could then see a new 1.31-1.34 range especially as the well-known shorts in sterling have barely been squared up over the last few weeks.