• All surveyed analysts expect the Bank of England to keep monetary policy unchanged, with the bank rate at 0.5% and the Asset Purchase Facility at GBP 375bln
• Focus expected to instead by on minutes and Quarterly Inflation Report (QIR) release with minutes expected to show a 7-2 vote split on keeping rates on hold
• QIR will be analysed to see if it compares or contrasts to recent hawkish BoE rhetoric
HOW THE REPORT IS RELEASED
The bank will release their rate decision, minutes and quarterly inflation report (QIR) all at 1200BST with the QIR press conference to be held by Governor Carney at 1245BST. Given the volume of information on offer, the release is likely to be met with volatility. For the sake of simplicity, the rate decision and vote split will be covered first and then any pertinent comments from the QIR and minutes. However, given that the rate decision is expected to remain on hold then coverage will likely centre on the QIR and minutes in order to asses a more likely timeframe for rate lift-off.
BACKGROUND
The rate decision is expected to see the BoE keep policy on hold , however the minutes could prove to be more interesting.
Consensus suggest this month’s minutes could see a 7-2 vote (currently 9-0) with some analysts even suggesting a 6-3 vote after July’s meeting saw ‘a few’ members suggest a `fine balance` between voting for a rate hike or not. The two most touted members to vote for a rate hike are McCafferty and Weale. Other names include Miles, who is leaving the committee after this month and has recently forecast inflation rising to the 2% target towards the end of this year, and Forbes who has previously been considered the most likely member to join McCafferty and Weale. It should be noted however that if BoE’s Miles were to vote for a rate hike, it would be less consequential than other members as he is being replaced in September by Gertjan Vlieghe, who analysts at Barclays and Citi both forecast will have a more dovish leaning.
The BoE’s QIR could also prove of interest to many participants, with the report potentially shedding more light on the bank’s outlook for inflation and growth. The previous report suggested that CPI is on track to return to the 2% target in 2 years despite cutting the 2016 CPI forecast to 1.6% citing downside risk to near term inflation.
Since this report, inflation has failed to show any marked pick-up (currently stands at 0.0% Y/Y). However, the central bank themselves have been more upbeat for the inflation outlook (as per above comments from Miles). That said, analysts suggest that although it is hard to pinpoint an exact forecast, there is downside risk to near-term inflation outlook given the appreciation of GBP and continued decline in oil prices. Nonetheless, analysts at Goldman Sachs suggest that the 2yr outlook for inflation could be lifted and if so then participants could be presented with a steeper curve.
From a growth perspective, the latest GDP reading saw Q2 print at 0.7% Q/Q which has subsequently led to a more optimistic outlook for UK growth (also allied with a dissipation of fears surrounding Greece) and as such there could be a potential shift in expectations on this metric despite having been cut in the previous report for 2015 and 2016. Some commentators add that the latest figures could lead policy-makers to shrug off the disappointing Q1 reading of 0.4% and thus could provide one of the more hawkish elements of the release .
In terms of other metrics, hawkish tones could also be provided by any further mentions on slack which was seen as shrinking in the previous minutes release . With regards to wage growth, this may take somewhat of a back-seat this time round given that economists’ view that little has changed on this front since the previous report in May.
MARKET REACTION
Given the mass of information on offer it is likely that markets will see a bout of volatility. However, in terms of potential market reactions, one thing to consider is that recent rhetoric from the BoE has been particularly hawkish and as such, a bulk of the risk could be to the downside, particularly if the BoE are more downbeat on the inflation outlook in the near-term and there is no dissent in the BoE, a view shared by Scotia. Should this be the case but the bank are more optimistic in medium term inflation, then as mentioned by Goldman Sachs, the UK curve could see a significant bout of steepening. Nonetheless, if there is dissent on the MPC and the central bank downplays inflations risks while being optimistic about UK growth prospects then this could lead to appreciation of GBP and a sell-off in Gilts as participants bring forward rate lift-off expectations.
ADDITIONAL INFORMATION
For those interested in viewing the May Quarterly Inflation report please click here [13]