The Bank of England will keep rates unchanged at 5.25% on Thursday, for the fourth consecutive meeting. But the vote split is expected to change as the three members who were in favour of a rate hike in December are likely to join the majority sitting on their hands.
Changes to the statement and forward guidance will set up Governor Bailey and the MPC for their press conference. It seems market volatility will increase on any dovish noises, perhaps more so than more hawkish ones, though the omission of “further tightening in monetary policy” from the statement is probably already priced in. However, we are most likely not at the stage where the bank can signal they are looking beyond how long policy needs to stay restrictive.
Data mildly encouraging
Since the last meeting in December, GDP expanded while survey PMI figures stayed strong with the composite and services prints rising more than expected. The two important gauges for the MPC were mixed with wage growth falling to 6.5% from 7.2% in the three months to November. However, the inflation data did tick up with the headline advancing to 4.0% and the all-important services number ticking a tenth higher to 6.4%. Still, the trend towards the bank’s target is encouraging even if a little bumpy.
The MPC will publish updated economic forecasts, with policymakers set to lower their inflation projections after price growth printed below the bank’s most recent forecasts from November. Any dip below the 2% target for the key two-year estimate will grab the market’s attention and could see sterling sell off as rate cut expectations ramp up.
Market reaction
A more neutral tone and language will probably be the way forward for the MPC. While inflation is set to fall much closer to target by the summer, upside risks could spring from simmering Middle East tensions and rising oil prices. Fiscal stimulus in the shape of March Budget tax cuts and still relatively buoyant PMI data should also underpin support for the pound.
Money markets price in less than 100bps of rate cuts for this year, having had more than six 25bp cuts fully priced at the end of the last year. May is currently seen as lift-off time for the first reduction, but this is close to a coin toss. GBP has been the best performing G10 currency against the dollar this year, so any policy easing noises would hit the pound. On the flip side, a continued hawkish bias, certainly compared to the ECB and possibly the Fed, will help keep GBP buoyant.