Good afternoon,
So-called ‘Super Thursday’ has rarely lived up to its name. This Thursday’s November rate decision from the Bank of England however, released alongside the minutes of said meeting and the press conference as part of the Quarterly Inflation Report, will be the most watched policy pronouncement from the Bank of England since last year’s Brexit vote.
There is a lot to keep an eye on but these 6 points are what we will be monitoring closely to get an idea of what this means for the UK economy and the pound moving forward.
1) What will actually happen to rates?
It’s not guaranteed, of course, that the Bank of England will even raise interest rates on Thursday but not doing so would represent a huge failure in the Bank’s communications policy and could set back future rate policy. The Bank, and its Governor in particular, has been criticised for ‘crying Wolf’ in the past and any disappointment would be viewed very dimly by markets and the business community.
Our expectation: We think that the base rate will be increased to 0.50% (an increase of 25bps), a de facto reversal of the emergency cut put in place after the EU referendum last year.
2) Will the vote be unanimous?
We have changed our minds on this in the past few weeks. The first impulse of expectations of this November meeting being repriced came in mid-September following two speeches; one by Governor Mark Carney and one by uber-dove Gertjan Vlieghe. The latter’s was more important to market expectations as it showed that even the most dovish member of the Committee was talking up interest rate rises.
Since then the UK economic situation has remained very modest. The recent weakness in UK economic data and comments from Monetary Policy Committee members Ramsden and Cunliffe have not been enough to change our belief that interest rates will rise but that the unanimity is drifting out of the decision. We now think that both members Ramsden and Cunliffe will vote to hold rates as is in November with new member Silvana Tenreyro a wildcard that could also join them.
Our expectation: we think that the Bank will vote 7-2 to raise interest rates although we cannot discount a 6-3 vote. The more the decision is away from unanimity the weaker the reaction will be for sterling.
3) Forward Guidance?
This is the most important factor of the Thursday meeting; what happens to rates this week is almost inconsequential given the need for markets to begin to price in what happens next. Are we one-and-done or is this the beginning of a series of rate hikes? Currently another rate rise is priced in for June/July next year with another in September 2019.
We maintain our belief that any interest rate rise at the moment is a policy mistake but the fall out could be limited by commitment to any further increases being done on a ‘gradual’ basis and an understanding that this is a reversal of the post-referendum ‘emergency’ cut. ‘Gradual’ in expectations parlance means a rate rise of 25bps every 6 months.
Obviously the language within the minutes and the press conference on the wider UK economy – inflation, wages, consumer credit – will also have a bearing on this.
Our expectation: A commitment to ‘gradual’ interest rate rises would prove to be sterling positive although the language on inflation may weaken this argument.
4) Inflation and GDP forecasts
The Bank’s most recent growth forecasts show GDP shuffling along around the 1.6 to 1.7 per cent mark for the next two years against a pre-crisis average of almost 3 per cent. We expect little change.
Inflation is crucial however and amongst the chatter about sterling and the Brexit vote and what that has done to prices, another impulse of inflation may be ready to emerge from within the UK economy. If the Bank of England believes that the UK economy is coming close to a level of ‘full employment’ then it has to be ready to raise interest rates to head off inflationary pressures. While a lot of people are in work, productivity is weak so while the UK economy may not be powering ahead, rates may have to rise to fulfil the Bank’s mandate for price stability.
We would council that while the overall numbers of what growth and inflation are likely to be are important, the ratio and divergence between the two of them will give as good an interpretation of what the Bank of England thinks is going on in the UK economy as anything.
Our expectation: Growth at about 1.5% on the year with inflation remaining close to 2.5% over the Bank’s 3 year policy horizon.
5) Will there be an impact on Brexit?
Carney and the Bank of England have come in for criticism from Brexiteers for certain things said following the vote in June of last year. A ratcheting up of expectations around a no-deal Brexit in recent months could be very easily commented upon by the Monetary Policy Committee.
In wider terms, we have to wonder whether a deterioration in economic news will see the worm turn on Brexit. Data in a YouGov poll published earlier this month for The Times of London indicate that the public mood is starting to shift.
The YouGov survey indicated – once “don’t knows” were removed – that 53 per cent of respondents thought the vote to leave the EU was wrong, and 47 per cent right. That 6 point differential is the largest since the vote in some 41 polls done since June 23rd last year.
Our expectation: the Brexit tribalism will continue with forecasts backing either side held up as an example of their ‘correctness’.
6) What about sterling?
So what does this all mean for the pound? If rates don’t rise then sterling is done for. Any decision to not raise rates will have come as a result of fears of profound economic weakness.
On the basis that 51 of the 59 economists surveyed by Bloomberg are not wrong and the Bank does boost the base rate we think that the crucial delineator of whether Thursday provides GBP a boost or not will come from the language on future hikes. If traders interpret the policy statement as akin to a ‘one-and-done’ then we would expect sterling to fall despite the increase in borrowing costs. Similarly, ‘gradual’ and ‘limited’ increases in the base rate will provoke sterling strength in all likelihood.
If you have the time and inclination we will be running through our thoughts in more depth on Thursday morning in our typical monthly webinar. If you have not signed up already you can do so at the link below.
For now, have a great week.
Jeremy Cook, Chief Economist