Submitted by Rajan Dhall of FX Daily
Going into the MPC announcement later on the this morning, no one is expecting any change in policy, nor should they - now or indeed any time soon. We would expect this view to be shared by the broader spectrum of investors, but as we know, the reaction today hinges on whether we get any additions to the hawks that are Messrs McCafferty and Saunders, and this would be enough to send Cable on another rally higher, where would likely see the upper end of what we believe is the current range of 1.2500 to 1.3500.
For the economy, there really is no basis or just cause to hike rates in response to the higher inflation reading this week, driven by higher Oil prices and clothing. Clearly this would heap more discomfort on UK households, who are seeing real earnings diminishing as the latest jobs report highlighted yesterday. As such, we believe the MPC should grin and bear it and governor Carney will have to write his due letter to the Chancellor should the headline rate tip 3.0% in the months ahead.
As most of us know, exchange rate factors are largely why we are seeing CPI at current rates, and this is reflected in the damp readings in the other major economies - not least of all Europe and Canada, where their respective economies are enjoying strong growth. In the UK we are not, the prospects of which are not exactly being helped by the decision to leave the EU! Carney should reiterate this later today.
We sense their is an air of regret in having pre-emptively cut rates last Aug in the immediate response to the Brexit vote. At the time the data was holding up and continued to do so in the months leading up to year end, but combined with this move was the needless hard line taken by Theresa May in her approach to the negotiations, which she has since had to temper, but which conspired to send the Pound sharply lower, and eventually through 1.2000 - albeit briefly. The currency move has been just as much instrumental in causing havoc on the economy - perhaps more so than the uncertainty that lies ahead. On this basis, we expect the BoE to limit any further damage to the economy and stick to the similar lines communicated at the last meeting.