BoE Monetary Policy Preview – Hawkish or Dovish?

The Bank of England is due to meet today at 1100 GMT as expectations call for the BoE to keep its policy unchanged. Of particular interest will be the MPC votes which as of the last meeting saw one dissenter voting in favor of a rate hike. Over the month, data from the UK hasn’t been very encouraging. The second quarter GDP was confirmed at 0.7%, with current data pointing to a slowdown in the UK’s third quarter GDP. Yesterday, the NIESR GDP estimates showed a 0.5% growth.

Adding to the dovish bias is the inflation which as remained low ranging between -0.1% and 0.1% since April this year. On an annualized basis, the UK inflation has remained at 1.0%, well below the central bank’s target rate of 2.0%. The BoE, in one of its forecasts noted that inflation would stay low through the end of 2015 and that it would pickup only during the late Q1 of 2016. With inflation expected to stay low, the BoE could most likely stand pat on policy. Expectations for a BoE rate hike have also been pushed back from Q1 of 2016 to Q2.

Rhetoric from various BoE members however have been mixed. While some members have sounded very hawkish on rate hikes, other members were more inclined to the dovish camp with some members noting that the BoE could even look into cutting rates should data remain weak.

Previously, the main driving factor for the GBPUSD has been the monetary policies with speculation on which of the two central banks would embark on a faster rate hike cycle. However, with the US Federal Reserve standing pat on policy in its September meeting and October very unlikely to see any rate hikes, expectations have shifted to December and with the potential of a very gradual and a slow pace of rate hikes. The BoE as well is expected to act only after the Federal Reserve hikes rates.

In today’s MPC minutes, the markets will be looking to any reference from the slowdown in China. While the BoE had downplayed the concerns from the slowdown in China and the sharp equities declines in August, references to China in the past few weeks have grown more vocal. The only bright spot for the UK’s economy has been the unemployment data which as of September showed the UK’s unemployment rate improving to 5.5% from 5.6% previously, while the average earnings index posted a strong 2.9% growth, up from 2.6% previously. However, further evidence needs to be seen that the UK’s average earnings index is on an uptrend with a confirmation the unemployment rate at 5.5% wasn’t just a flash in the pan.

The British Pound which has weakened over the past few weeks showed signs of a recovery yesterday led by a surprise gains in the industrial and manufacturing data. However, with the correction now complete, a dovish BoE could most likely see the GBPUSD resume its downward descent with 1.50 being the level to watch for in the medium term.