From CA's Valentin Marinov
BoE inflation report - strong GBP made all the difference it seems
Reading through the August inflation report two things seem to stand out:
1/ The MPC is more optimistic on (domestic demand-driven) GDP growth – supported by growing wages, cheaper bank funding and growing house prices. Indeed, they revised their growth projections slightly to the upside compared to May.
2/ The MPC has turned more cautious on inflation because of persistent commodity price weakness and, indeed, FX appreciation. This is reflected in their lower inflation projections.
The message is: yes, we will hike but not before we are certain that the negative impact from lower commodity prices and stronger GBP have abated. The above also means that to a certain degree the decision to hike or not is not really in BoE’s hands, at least for now. This is different from the Fed, where we do see clear signals that hikes will be needed fairly soon.
This also means that verbal intervention in GBP by Carney is now a distinct risk going into the press conference at 12:45
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Update:
Many investors (especially the GBP-bulls) likely found the super Thursday rather underwhelming. If anything, we know now that the BoE is watching a factors - internal and external - when decide on the policy outlook. As regards the post-IR press conference, I was very interested to hear what Carney has to say on the impact of GBP on inflation and external imbalances. My impression is that, while the BoE is monitoring the latest FX appreciation, there doesn't seem to be an immediate worry as such.
All that highlights the data dependent nature of the BoE's policy outlook at present. It seems that the BoE will respond in equal measure to evidence of domestically driven inflation and external disinflation. I would think that persistent GBP strength and/ or global commodity price weakness could force the BoE to wait for a bit longer from here. Essentially this is a warning for the GBP-bulls - sustained FX appreciation from here could shift the balance of risks against early rate hikes.
With the BoE's policy trifecta behind us focus will shift to NFP tomorrow. If anything, and different from the BoE, the Fed does seem closer to hiking rates. This means that it would take a significant NFP disappointment for markets (eg a print less than 200K) to abandon bets on September lift-off. In the absence of disappointment, the USD should remain supported broadly. We continue to see risks for GBP/USD on the downside from here.