Bank of England (BOE)

BoE Meeting: MPC votes 7-2 to keep policy unchanged


At its September policy meeting, the Bank of England (BoE) left interest rates at a record low level of 0.25% and monthly bond purchase program at £435 billion during. The nine-member Monetary Policy Committee (MPC) voted 7-2 to leave interest rates unchanged, with the rock hard hawks for several months- Ian McCafferty and Michael Saunders voting for interest rate hike. 

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With inflation at the upper boundary of the tolerance band and the uncertainty about the future development of British economy, members of the Monetary Policy Committee of the BoE will convene this Thursday. The nine-member committee favors current stimulus of ultra-low interest rates combined with the monthly bond purchase program, with no change expected.

Markets will focus on any changes to the central bank’s voting pattern and change in language on interest rates. The Bank of England is likely to keep the rate hike talk alive and ensure the British Pound remains mildly bid around current levels (against EUR and USD). It appears that the markets have already priced-in the possibility of the hawkish shift.

1. Price Scenarios
Key levels for GBP crosses on the upside and downside

2. What to expect this time?
How many doves and hawks? Hawkish shift? 

3. What to expect in the future?
How will Brexit negotiations impact monetary policy? Rate hike projections

1. Price Scenarios

  • Rejection at 1.34 followed by an end of the day close below 1.30 would signal the pair has topped out.

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2. What to expect this time from the Bank of England?

Context & info of the event - Rate hike unlikely, but probable hawkish shift

It’s an important Bank of England meeting. There will be no Carney’s press conference, but the BoE is releasing its interest rate decision together with its monetary policy summary and minutes at 11.00 GMT.

Even though BoE is likely to keep rates unchanged, expectations about a hawkish shift are there. Most investment banks expect September’s announcement could have “hawkish tinge”. Expect a 7-2 split in favor of keeping rates on hold, but do not rule out a 6-3 vote split.

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Key indicators to watch on the BoE vote and minutes

Inflation should be the main concern for BoE MPC members on the upcoming meeting. Consumer price index rose by 2.9 percent year-on-year in August, with motor fuel prices being the main driving factor. The effect of Sterling’s depreciation pushes the import prices higher affecting domestic price level in the UK.

Nevertheless, since February of this year, inflation has exceeded the central bank's 2% inflation target, which has already announced that in the light of Brexit-related uncertainties it is willing to tolerate an overshoot in the inflation target, assuming that inflationary factors are of a temporary nature. Post-Brexit related Sterling’s depreciation is expected to gradually fade out in 2018 and domestic prices are expected to drive UK’s inflation only.

In this context, wage growth is of the utmost importance in the UK. Wages are rising at a significantly lower pace compared to inflation. According to the latest reports from the UK labor market, average weekly earnings of employees in the UK rose 2.1 percent year-on-year in August, both including and excluding bonuses. This means that real, inflation-adjusted wages fell 0.5 percent over the year.

On the one hand, the Monetary Policy Committee cannot justify keeping interest rates at the current record low level of 0.25% for too long given the acceleration in inflation.

But on the other hand, Mark Carney and his MPC colleagues are fully aware of the risks to economy if they were to tighten monetary policy more aggressively when inflation is overcooked.

UK Consumer Price Index (YoY)
Avg Earnings including Bonus (YoY)

How many doves & hawks?

There are three potential scenarios for the BoE meeting:

  • Hawkish - 6-3 vote split... something markets aren't expecting. Thus, Cable would extend the rally to 1.35 levels.

  • Neutral - BoE acknowledges the spike in inflation, but votes 7-2 to keep rates unchanged. A spike to 1.34 is unlikely to last long.

  • Dovish - BoE stresses the fact that wage growth remains anemic and the rise in inflation is mostly due to exchange rate. The vote split remains unchanged at 7-2. In this case, Cable could revisit sub-1.30 levels.

Rock hard hawks voting for interest rates hikes for several months already are represented only by two external members of the committee, Ian McCafferty and Michael Saunders. Their voting pattern in favor of interest rate hike, as well as the end of the asset purchasing program, is justified by the fact that Brexit related unprecedented drop in economic activity never really happened so far and, even more importantly, because inflation exceeds its own inflation target of 2 percent

The key question is whether the Bank of England chief economist Andy Haldane will join the camp of hawks within monetary policy committee. He has already said back in June that there had been a shift in the break-even point between when it was “too early” and when it was “too late” to raise interest rates. Haldane said that he is convinced that a tightening of monetary policy is likely to be needed even before the current scope of market expectations.

3. What to expect in the future from the Bank of England?

Hawkish tilt priced-in, rate hike brought forward?

It appears that the markets have already priced-in the possibility of the hawkish shift.

That said, even if the Bank of England will raise interest rates over the horizon of next twelve months, it should not be interpreted as the beginning of the tightening cycle, but mere leveling of emergency post-Brexit rate cut from August last year.

  • The Overnight Index Swaps market has already rushed to price in a greater probability of a rate hike from the BOE by year end.

  • The market now expects a 30% chance of a hike in December, this compares with 20% a week ago.

  • The probability of a rate hike has been brought forward to mid-2018, following higher-than-expected inflation numbers

Brexit negotiations, exploring unknown territory

The progress in Brexit negotiations is slower than expected. The next round of negotiations, originally scheduled on September 18, is postponed by a week. Media reports suggested that UK's PM Theresa May was preparing to make an "important intervention" on the talks. While the UK urged the EU to be more flexible and to move to trade deals, the EU insisted that the “divorce bill” issue has to be resolved first. EU's chief negotiator Michael Barnier noted last week that he was “very disappointed” by the UK government as it “seems to be backtracking” on commitments to the bill.

While the hawkish members, mainly Michael Saunders and Ian McCafferty, would warn of strong inflation on the economy, the rest would consider the overall economic environment and uncertain outcome of Brexit as key factors to keep the monetary policy unchanged.

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The World Interest Rates Table

The World Interest Rates Table reflects the current interest rates of the main countries around the world, set by their respective Central Banks. Rates typically reflect the health of individual economies, as in a perfect scenario, Central Banks tend to rise rates when the economy is growing and therefore instigate inflation.

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