The market is broadly expecting the BOE(Bank of England) to cut by a quarter of a point on Thursday. That puts the onus of for the market reaction on the commentary from the central bank, including Governor Andrew Bailey’s post-rate decision comments. Of particular interest will be the release of updated economic projections which could give some clearer insight into what will happen with interest rates going forward.
While there is a pretty solid agreement on what will happen at the upcoming meeting, beyond that there are a wide range of opinions. The BOE(Bank of England) is seen shifting to easing mode after falling behind other central banks in lowering rates. But even though there are some strong economic indicators to push for easing, others can be an obstacle. That means the market could have a bit of a jumpy response to the upcoming meeting.
What Are the Forecasts?
Economists are unanimous in their projections for a rate cut this week. Meanwhile, the market sees about a 90% chance, according to the futures rate curve. That means that even if the BOE(Bank of England)delivers as expected, there is a small bit of room for the pound to weaken a bit. However, other factors are expected to largely overwhelm that effect.
What happens after that is where there is significant discord, however. The market is pricing in just two to three rate cuts over the course of the next year, implying that there will be another “pause” at the March meeting. On the other hand, brokers are predicting as much as five rate cuts, which means that there could be back-to-back cuts, particularly if easing is concentrated near the start of the year.
The Deciding Factor
As usual, the focus will be on the vote split to see how strong the intention is for either option. Last time around the vote to hold had three dissenters expected to cut. This time around, the consensus implies a stronger number of votes in favor of easing, potentially as much as 8-1. A more divided vote could leave the market with the impression that the BOE is more reluctant than expected to ease.
But more than that, the Monetary Policy Committee (MPC) report that comes along with the rate decision will be in focus. That will include the latest projections from the BOE(Bank of England)about where it expects inflation and the economy to go. If inflation is expected to be lower, and the economy is seen growing at a slower pace, then that would make the case for more easing. The data since the last time the report was issued back in November has substantially deteriorated, leading the market to expect a downgrade in expectations.
What Could Move the Pound
With the market expecting the BOE to project lower inflation, there is a risk that the pound could pop up if the MPC report doesn’t cut the outlook as much as anticipated. That could be because of the faster than expected wage growth which has been reported recently, suggesting the jobs market remains tight. That keeps up inflationary pressure on the services sector, something that Bailey has warned in the past is an obstacle for easing.
Given that the economic data recently has pointed in different directions (wages higher; inflation lower), it could come down to a matter of which aspect the BOE(Bank of England) prioritizes. And that could cause a bit of a bumpy ride for cable after the rate decision until the market reprices in rate cut expectations.