BoE: MPC meeting should hold no surprises - MUFG

Derek Halpenny, European Head of GMR at MUFG, suggests that the BoE’s MPC will announce its monetary policy decision today at 12 noon and after the easing package announced last month, the MPC is set to announce an unchanged monetary stance.

Key Quotes

“For the pound the only area of focus will be on forward guidance and what signals are given in the minutes of the meeting over the potential for the MPC to follow through with its guidance last month that a further rate cut will be forthcoming before the end of the year. Certainly we may get an acknowledgement in the minutes that the recovery from the initial shock to Brexit has been impressive although as Governor Carney highlighted in testimony to parliament last week, the BoE fully expected there to be a notable recovery in sentiment.

But Governor Carney also accepted that there were now perhaps upside risks to the BoE growth projection in Q3 of around 0.1% Q/Q given the resilience of actual data on consumer spending and the labour market. Of course offsetting that to some degree will be the fact that data on inflation has also been muted. The annual inflation rate in August came in at 0.6% this week, the same as in July and this implies a high chance that the Q3 2016 inflation projection in the QIR of 0.76% will prove  too high.

Average earnings, excluding bonuses came in weaker than expected in July in data released yesterday, further reinforcing the limited signs of upside risks to inflation forecasts. The resilience of the pound in the wake of what was a set of more aggressive easing measures than expected in August also points to more limited upside inflation risks ahead. The trade-weighted GBP index from the BoE fell in the wake of the easing last month but from the post-easing low on 15th August, the pound has strengthened by 2.6% through to Tuesday this week.

So at the margin we would argue that the need for the final 15bps of easing by the BoE signalled last month is perhaps a little less needed than originally expected. However, the limited signs of inflation will allow the BoE to maintain that option for now although the tone of the minutes may convey a degree of cautious optimism relative to the sense of concern when aggressive easing was implemented on 4th August.

Short-term risks for GBP/USD are perhaps still to the upside given the short speculative position that remains in the market is still substantial and given the BoE may have become a little less concerned over the short-term risks to the real economy.”