Markets are a bit uncertain about what could happen at Thursday’s BOE meeting, which increases the chance of some volatility no matter the outcome. The consensus is pretty solid that there will be a pause at the upcoming meeting. But the vote split on that hold could give the market reasons to move.
At the last meeting, the BOE had an unusual three-way split, between holding, and cutting as much ast 50bps. That showed a significant amount of division among MPC members. Analysts are expecting those differences to have reduced, so there will be a clearer vote result this time around. That could help the market gain more confidence in a forthcoming rate cut – or shatter those hopes.
Are Things Cooling Enough
The main theme in UK data over the last month has largely been signs of cooling. Unemployment was higher than expected, with the labor market seen loosening. GDP was also softer than hoped. And finally, what markets were waiting for in order to set up their projections for the upcoming meeting, May CPI inflation cooled as well.
However, there was a bit of a mixed picture that could complicate things a little for the BOE. While inflation was lower at 3.4% instead of the 3.5% expected, it is still well above the 2.0% target. Which means that if the BOE were to move to support the flagging economy, there is still a substantial risk of an inflation flare up.
Geopolitics vs Tariffs
There does seem to be a growing sentiment within the BOE’s decision makers that tariffs at least for the UK are likely to have a deflationary effect. In fact, that was reflected in the most recent CPI data, where core inflation fell faster than headline consumer prices. But, just like high inflation expectations from tariffs, it could also be transitory.
The recent conflict in the Middle East has pushed up oil and gas prices, which would filter through to the consumers at some point if the situation is maintained. The prospect of higher inflation from higher energy costs filtering into the economy could give ammunition to BOE hawks. Or at least make it into the monetary policy statement, and get investors worried that the BOE will be too cautious about cutting.
It’s All About the Future
In the end, investors are going to be looking for clues as to what happens in August, since the market has already largely priced in a cut for that meeting. That means the vote split could be pivotal, with as many as four dissenters voting to cut seen as a clear dovish sign. But a split closer to 8-1 (Dhingra being the eternal dove) might mean that the BOE is more dovish than the market thinks, and send the pound higher.
There is always the odd chance of another three-way split, with a majority voting to hold, while those voting to ease are divided between 50 and 25 bps. That would likely also contribute to the impression of a more dovish BOE, and weaken the pound.
