Good morning,
Today’s Bank of England interest rate decision and subsequent press conference is going to be incredibly interesting as it will likely set the table for rate expectations, either higher or lower, through this current impulse of above target inflation.
Interest rate markets are not pricing in a hike and while there is always the chance of a surprise, central bankers are not in the business of shocking markets and thereby consumers at the moment.
Why no hike?
The reasons are multiple and while inflation has run above target in recent months and will, in all likelihood continue towards the end of the year, price rises and their control are not the only box that a central bank has to tick. Growth is stagnant at best and recent data from UK businesses has shown that while costs are increasing, margins are falling as are hiring intentions.
A hike does not help this.
Readers of this weekend’s Sunday Times will have seen that the Bank of England is said to be contacting banks in order to report on their level of credit card and car loan debt that they hold given the concerns over just how much the average Brit has spent beyond their means in the past few years.
Higher interest rates may allow inflation to drift back to its 2% target in the next year or so and similarly we may see investment pick up into the UK economy from yield hungry investors. However, this all takes 6-12 months at least whereas an increase in interest rates is passed on to consumers within days. Wages are not strong enough for higher borrowing costs and while some members of the Bank’s Monetary Policy Committee may think that a hike is worthwhile we have serious doubts that the majority will be swayed.
A hike does not help this either.
How could sterling perform?
There are a number of reasons why sterling could run higher today. The most likely cause would be if more than the consensus number of two Monetary Policy Committee members vote for a rate hike. We don’t think that we will see this but Andy Haldane as Bank of England Chief Economist is proudly the most awkward member of the rate setting committee and likes to be a contrarian.
Similarly, any change in the profile of the Bank of England’s inflation expectations higher will likely boost the pound although that may be tempered by lower growth estimates.
On the other hand, Governor Mark Carney has weakened the pound in the past during a post-decision press conference by leaning on the uncertainty around Brexit. Recent speeches that have generated some two-way risk in the pound, may be enough to quell consumers’ inflation expectations in the short term but we are unsure whether Carney’s comments on Thursday will echo this.
The decision is due at 12 noon with the press conference thirty minutes later.
Elsewhere
We have services PMIs due from around the world throughout the session and once again we will be watching to see just how inflation pressures are building.
Have a great day.
Jeremy Cook, Chief Economist