Bank of England preview: new name, but will this report be any different from last time?
The Bank of England will announce its latest policy decision and release its inaugural ‘Monetary Policy Report’, which will house the BOE’s quarterly inflation and growth forecasts, this Thursday at 1200 GMT, the BOE’s governor Mark Carney will speak at 1230 GMT. As we lead up to this meeting, the FTSE 100 is marginally higher, although it is mostly directionless along with other global indices, and sterling has fallen back from recent highs.
Report highlights
The key things to look for in this report include: 1, has the BOE’s outlook for the UK economy fundamentally changed since the August report. 2, what is the outlook for interest rates? Will the Bank suggest that rates will rise in 2020? 3, Will the MPC suggest that some of the downside risks for the UK economy have dissipated now that the Brexit deal with the EU is in place and the US and China have made headway towards a trade deal? The answer to all of these questions will be the key driver of sterling and UK stocks, particularly those in the FTSE 250, in the next few days.
We would urge some caution around trading the immediate aftermath of this report on Thursday, as the new-style report will be a slimmed down summary of the Bank’s projections. The Bank will also bring its conclusions to the front of the report in an aim to bring to prominence the thematic discussions that are driving policy decisions at the Bank. While simplified communication from a central bank is always welcome, the market is likely to come to its own conclusions about the trajectory of UK monetary policy much faster than it used to during the Inflation Report days, thus there could be extra volatility in UK asset prices around Thursday lunchtime.
The UK’s growth picture:
This is the key driver of all market action that comes from Thursday’s Monetary Policy Report. Back in August, the BOE downgraded growth and inflation forecasts and pushed out the chances of a rate hike. Since then the UK economy has performed relatively well, especially in comparison to some of its European peers. On Friday the first release of Q3 GDP will be announced, this is expected to show that the UK economy picked up by 0.3% in the third quarter. While this isn’t exactly an overheating economy, it does suggest that the UK economy, mired in Brexit uncertainty, has managed to swerve a recession. Now that it appears that the UK will leave the EU with a deal, will the Bank upgrade its growth forecasts for the UK? Last month, BOE Governor Carney suggested that an orderly Brexit could boost the UK’s economy, however, that was before an election was called, will he change his mind now that we are officially in election season?
Election uncertainty to hit pound
Our view is that the outlook for Brexit is marginally less clear while we wait for the outcome of the UK’s General Election. The outcome of the election remains uncertain – for example, the Brexit Party, which is calling for a no-deal Brexit, saw its support jump some 4% this week. Brexit may also not be the BOE’s main concern at this junction, instead there is a huge amount of uncertainty around tax and spend decisions, with the main parties both pledging big public spending campaigns if they win power. It is impossible for the BOE to put fiscal largesse into its growth and inflation modelling systems ahead of time, thus, we expect the Governor to say that the outlook for the UK’s economy remains uncertain until the new government is installed at Downing Street and their policy path becomes clear.
What next for interest rates
Due to this heightened level of uncertainty, we believe that the most important part of this Monetary policy Report will be the BOE’s stance on interest rates. We expect the Monetary Policy Committee to vote unanimously to keep rates on hold on Thursday, and we don’t think that the increased uncertainty caused by the UK election will necessarily mean that the BOE will shift to a more dovish stance on rates. While the domestic and global economic risks abound, the BOE is likely to remain cautious, however, because the BOE’s forecasts are two years into the future, we expect that the BOE’s forecasts will point to rates rising eventually, possibly once in 2020 and once in 2021. However, that will be dependent on Boris Johnson winning a majority at next month’s election and the UK having an orderly Brexit. The BOE is unlikely to be too dovish due to the tight labour market and the threat that this poses to inflation down the line. Although the latest survey data from the UK economy does not suggest that price inflation is a big concern yet for the economy, wages are rising and at some point, that could trigger inflation. The BOE will not want to suggest that it is turning a blind eye to these risks, even if they remain some way off in the future.
The sterling outlook:
Overall, we believe that a slightly more optimistic report, albeit cautious in tone, could trigger some upward momentum in sterling. GBP/USD has fallen back from the $1.30 highs of 18thOctober, as election fears have set in. The BOE remains one of the major central banks not to have loosened monetary policy in recent months, thus a firmly neutral stance from the Bank on rates could see some limited GBP upside in the next few days. $1.2935 then $1.2990 are likely to remain stiff resistance levels, and any move back towards $1.30 on the back of this report could be faded by the market, especially if we continue to see flux in the election polls in the coming days. A brighter economic outlook from the BOE could trigger some upside for the FTSE 250, although a stronger pound could weigh on the FTSE 100.