•
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
• Headline UK CPI printed at 0.1% for July, still well below the BoE’s mandated 2% target
• The accompanying minutes release is expected to once again show an 8-1 vote split in favour of keeping rates on hold
The most recent inflation data from the UK revealed that Y/Y CPI (0.1%) is still at a relatively low level and with this in mind it is highly unlikely
that the BoE will chose to hike rates at this meeting.
Therefore, it will likely be the case that the accompanying minutes release will be the main source of investor focus. In terms of the vote split itself,
analyst estimates are expecting to see an 8-1 vote split with McCafferty set to remain as the lone dissenter. However, some analysts have noted that there
is an outside chance of Forbes or Weale joining McCafferty in dissenting and analysts at Morgan Stanley even suggest there is a moderate risk of Haldane
voting to cut rates.
As such, the comments from the minutes could potentially provide the bulk of any potential market reaction with focus on how the bank perceives ongoing
concerns surrounding China and the low levels of UK inflation.
As seen by last week’s ECB release, the central bank were particularly downbeat on the area’s inflation outlook and as such it will be interesting to see
if the MPC share this sentiment. With regards to China, recent comments from BoE Governor Carney pointed out that while a slowdown in China’s economy could
push down further on inflation, at this moment in time does not alter the central bank’s position on when it will hike rates. Analysts at Nomura also note
that the BoE have discussed China in each of their minutes over the past 6 months and therefore suggest the BoE will not be surprised by recent volatility.
As such, they believe recent trends in China will not be enough to force the MPC off their current timeline.
Another thing to bear in mind for this release is that it will be the first meeting for new MPC member Gertjan Vlieghe who has now replaced David
Miles.
In terms of Vieghe’s stance, some have suggested that he could lean towards the more dovish end of the spectrum. Additionally, given that it is Vieghe’s
first meeting it is unlikely that the central banker will wish to rock the boat by voting for a hike.
MARKET REACTION
Analysts suggest that while the vote is set to remain at 8-1, the greatest source of risk for the event could stem from the central bank adopting a
more cautious stance over events in China or being more downbeat on their inflation outlook.
Should this be the case this could lead to weakness in GBP, a flattening of the UK curve and support for UK equities due to a potential pushback in
expectations of a rate hike. Conversely if the BoE suggest they will continue to shrug off Chinese concerns or if a fellow MPC member joins McCafferty in
the dissenting camp, the opposite reaction could be seen with potential GBP strengthening, steepening of the UK curve and downside for equities.