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Bank of England rate decision

By David Morrison  |  01/08/2018 13:43
”rate

The consensus expectation is for a 25-basis point rate hike. But there are reasons why the MPC may decide to keep rates unchanged

Today’s MPC meeting is certainly ‘live’ in terms of the possibility of the Bank of England (BoE) announcing an interest rate hike. It includes the BoE’s quarterly Inflation Report followed by a press conference hosted by Governor Mark Carney.
 
25 basis-points price in
 
The consensus expectation is that the MPC will hike its Official Bank Rate by 25 basis-points to 0.75%, taking it to its highest level since February 2009. This would only be the second increase since the summer of 2007 when the rate went up to 5.75%. Just six months later the BoE began to cut as the financial crisis took hold, taking it down to 0.50% in early 2009. It then kept the Bank Rate on hold until August 2016 when it made a final 25 basis-point cut in response to the Brexit vote two months earlier – a move which it reversed in November last year.
 
Low unemployment
 
The UK’s employment situation is undoubtedly in a strong spot. The Unemployment Rate is steady at 4.2% - its lowest rate since the 1970s. Growth in Average Earnings recently overtook inflation, and there are good reasons to believe that tightness in the labour market, particularly amongst skilled and professional workers, could feed through to higher wages in the coming months. This should lead to a bounce-back in inflation which has moderated recently. Headline CPI is currently running at +2.4% annualised, down from the 3.0% we saw at the beginning of the year. From this point of view, it’s understandable why most analysts expect the MPC to tighten monetary policy.
 
Inflation down; growth tepid; Brexit risk 

However, the fact that inflation has fallen back towards the Bank’s 2.0% target over the first half of this year may militate against a rate hike. This would certainly be the case if MPC members feel that unemployment has bottomed for whatever reason. Add in a sharp decline in Retail Sales and tepid economic growth (1st quarter GDP rose just +0.2% for the three months ending March, down from +0.4% from the previous quarter) and likelihood of a rate hike decreases. Then consider the mess that the government is making over the UK’s withdrawal from the EU and the Bank probably has enough reason to keep rates on hold for another quarter.
 
‘Dovish’ rate hike?
 
Of course, the BoE may be anxious (like the US Federal Reserve) to push rates higher so that it has room to cut when the inevitable slowdown occurs. If that’s the case, then perhaps we’ll end up with a ‘dovish’ rate hike. This could be reflected in a tight vote amongst the nine members of the MPC. Each member, including the Governor, has a single vote which carries equal weight. At the last meeting the vote was 6-3 in favour of keeping rates on hold. Now the expectation is that the vote will switch to 7-2 in support of a rate hike. If the vote were narrower than anticipated, then it would suggest that we could wait a long time for further tightening. In addition, we must never underestimate Governor Carney’s ability to talk down the UK’s economic outlook. When it comes to putting a dovish gloss on monetary policy meetings Mr Carney has much in common with his ECB counterpart, Mario Draghi.

Cable under pressure
 
So, what of sterling? The GBPUSD remains under downward pressure, although it has found some support recently around the 1.3000 area. The daily chart shows clearly a series of lower highs and lower lows since the sell-off which began in mid-April, and this may suggest further weakness. While the Relative Strength Index (RSI) is no longer indicating a market which is oversold, it is effectively flatlining. Meanwhile, the MACD crossover is neutral although there is a slight positive divergence which could prove supportive for sterling going forward. In other words, the jury is ‘out’ when it comes to where sterling goes next. But the main downside risk would come if the MPC decides to keep rates unchanged. This could see the GBPUSD break below 1.3000 and retest support around 1.2800 in short order. A ‘dovish’ hike could also see sterling decline following an initial knee-jerk rally. But a hike followed by an upbeat message from Governor Carney would catch short sellers offside. If cable were to break above 1.3200, then it’s next upside target would be 1.3300 – the 23.6% Fibonacci Retracement of the April-July sell-off.
 
 
”sterling

Any information, analysis, opinion, commentary or research-based material on this page is for information purposes only and is not, in any circumstances, intended to be an offer of, or solicitation for, a transaction in any financial instrument. No representation or warranty is given as to the accuracy or completeness of this information. Any person acting on it does so entirely at their own risk and GKFX accepts no responsibility for any adverse trading decisions. You should seek independent advice if you do not understand the associated risks.
 

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