There is quite a bit of market anticipation ahead of tomorrow’s BOE meeting. In fact, there is the potential for some market-altering announcements.
With the interest rate at 0.1%, there has been increasing speculation that the BOE might cut the rate to 0 or negative. But that is still merely speculation at this point.
There is a near-unanimous consensus that the BOE will not change the interest rate, nor will they change their current asset purchase target.
But there is likely to be a lot of focus on other issues and in particular Governor Bailey’s comments.
What to focus on
We expect the most anticipated bit of the interest rate decision to be the release of the Monetary Policy Report.
It’s premature to expect the BOE to cut rates at this meeting because the MPR includes a consultation on the potential effects of negative rates on the banking sector.
It is very unlikely the BOE will spring a new policy on the markets without first presenting a report on the potential impact.
There is a consensus that the report will show that it’s possible but inadvisable.
Negative rates would be bad for the banking sector as it is already under pressure due to the uncertainty surrounding continuing negotiations with the EU.
Should the MPC outright say that negative rates would have a positive effect on the economy, then we could expect some substantial weakness in the pound as traders price in an increased likelihood of a rate cut.
It’s flat but not smooth sailing from here
There appears to be a considerable debate at the BOE about the convenience of negative rates. And that is why the MPR is likely to play a pivotal role this time around.
But the key decision-makers still seem to have an upbeat outlook for the UK’s economy. This is despite the latest round of lockdowns looking likely to last for the remainder of the quarter at least.
A majority of economists expect the BOE to cut its GDP growth estimate for this year, and to shift its expectations of a rebound until next year.
However, that is still in line with the current consensus of rates staying at the current rate well into 2022. And it’s not likely to have all that much of an impact on the pound.
It’s all in the curve
The BOE does feel bound to help the economy, but it’s not their primary focus.
The other data that is more central to their policy has come in better than anticipated since the last month. The increase in the joblessness rate has slowed.
Inflation has moved up, though not enough to threaten the bank’s policy objectives.
The UK remains one the fastest of the large countries to take up the covid vaccine, reaching over 14.4% of the population, far outpacing the runner-up United States at 9.6%.
By comparison, the European Union has struggled to vaccinate just over 3% of its population by the start of the month.
The UK appears to be well on track to complete enough vaccinations to allow for the economy to start returning to normal in the second quarter. That would make any further easing by the BOE superfluous.
