Forex Trading Library

BOE Rate Decision: Vote Focused

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The main focus for the upcoming BOE rate decision will be potential interpretations for future actions. The consensus among economists is universal that the BOE will keep policy unchanged. But there is considerable debate as to when it will move to an easing stance, and any comment in that direction will get extra scrutinized.

Like with other major central banks, there is a difference between what the BOE says it plans to do, what economists think it will do, and what the market is pricing in. At the last meeting, the BOE left the door open for more hiking. In fact, three members of the MPC voted in favor of more tightening.

The Future Looks Like Cutting

Economists believe that the BOE will get around to cutting somewhere in the latter half of the year. If that were the case, then the bank can keep its policy and future guidance unchanged. The market, on the other hand, disagrees. Futures suggest that a majority of traders see the BOE cutting rates for the first time as early as May.

That latter part is more important to gauge the market reaction. If the BOE gives indications that rates will stay high for longer than the market expects, then traders will have to reposition and that could give the pound a boost. On the other hand, if the BOE provides indications that the market is correct, then more traders might see yields falling, and that could weaken the pound.

It’s Just a Matter of When

To complicate matters though, the latest data out of the UK has been somewhat mixed. Inflation has been coming down in line with expectations, but the services sector (the largest component of the economy) is still facing upward pressure. That might mean that the BOE simply “punts” the pivot towards easing until the next meeting.

The UK economy still hasn’t been as bad as BOE Governor Andrew Bailey has repeatedly warned and feared. Without an outright contraction, the BOE has some room to keep rates higher in order to make sure that inflation does come down as expected. The UK labor market has also shown signs of resilience, allowing wages to keep growing above inflation, and keeping up that inflationary pressure.

What Could Indicate the Timing

There are two main factors that investors are likely to be looking at. The first is if the BOE drops references to the need to raise rates. As recently as the last meeting, it said that rate hikes were still possible. Removing that language would likely be seen by the markets as the BOE moving to “neutral”, and be the first preparations towards easing. That could be seen as confirming the market’s view, but not necessarily foreshadowing that a rate hike is imminent.

The second element is the vote count, which is now a major factor in tracking the BOE. The last time, the vote was 6-3, with the dissenters voting for a hike. If the decision is unanimous, the market might take it as a sign that the bank has moved to “neutral”. But an increasing number of dissenting votes in favor of cutting will likely be seen as a stronger sign that easing is closer than expected. That could cause the pound to weaken faster.

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