The Bank of England is the last of the major central banks to have their monetary policy meeting.
Despite being the most important event on the British economic calendar this week, we aren’t expecting a major change in terms of monetary policy.
Now that the Tory leadership spill is over and the Boris Johnson is settling in at 10 Downing Street, Britain is turning to a relatively quieter spell.
Brexit still looms on the horizon. However, Parliament is off for a month of vacation in August. Therefore, major votes or moves on that front are unlikely.
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BOE Governor Carney has, in the past, repeated that the interest rate path forward depends chiefly on the result of Brexit. Without much moving on that front, we’re in a bit of a wait-and-see pattern with interest rates in Britain.
The economic indicators from the UK are different from both the continent and from many of the other major economies. UK inflation is comfortable, and while economic growth is less than ideal, it’s not something that is causing overt concern for the central bank.
Some analysts have argued that were it not for the potential currency effects of a no-deal Brexit, the BOE would have hiked rates already.
The Odd One Out
The consensus is that the BOE will simply hold its current policy with, at most, a modest tweak in forward guidance. While other banks are looking to ease policy, the BOE’s chief economist Haldane recently said he saw policy as already relatively accommodative. He added that there was no reason to follow the other banks.
Not only that, but there is a pretty solid consensus that the BOE will reiterate its view that a gradual and limited rise in rate over an extended period could be necessary. If anything were to change, it’s likely to the wording of this statement. And that’s what could drive markets following the meeting!
The increased chances of a hard Brexit in October have also given the bank more reason to keep their powder dry ahead of what might be a turbulent period. The uncertainty leading up to such an event, and immediately after it, would make markets quite unhappy. And the central bank would want to have as many tools available to deal with it.
The market, however, has been pricing in rate cuts. Yet, in the speech scheduled after the policy meeting, we could expect Carney to push back on that notion. However, this is a standard position for the bank, so we won’t expect it to move the markets all that much.
On Monday Sterling hit a multi-year low. And there seems to be an impetus downward despite the insistence of regulators. A weaker currency might benefit exporters, but also contribute to inflation. This further supports the argument for rate hikes in the future.
But then there is always the black swan! With everyone focusing on Brexit, an escalation in tensions in the Middle East might catch people off guard. PM Johnson ordered the Royal Navy to escort UK-flagged vessels through the Strait of Hormuz after Iran seized a British tanker, in what was seen as a tit-for-tat move.
Summer is usually a quieter trading season, but it doesn’t look like that will be the case for the pound.