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BoE Preview: First Rate Cut for Four Years on a Knife Edge
The Bank of England (BoE) Monetary Policy Committee (MPC) will announce the latest interest rate decision on Thursday. The BoE will also release the latest Monetary Policy Report (MPR) which will contain updated growth and inflation forecasts. The rate call, forward guidance and updated forecasts will all be key elements.
- Implied volatility has surged, guaranteeing sharp Pound moves.
- There is a high probability of a split vote.
- The Pound will dip in immediate reaction to a rate cut.
- The recent shift in market pricing should limit Pound losses.
- There will be scope for an initial Pound spike higher if rates are held at 5.50%.
- Forward guidance and updated forecasts will be key for medium-term Pound direction.
- The Pound will rally if the MPC hints at no further rate cuts this year.
- The global dimension will also be key with the Fed statement on Wednesday.
A substantial majority of investment banks expect a rate cut at this meeting while markets are pricing in around a 60% chance of a move at this meeting compared with around 50% last week. According to ING; “We expect a 25 basis point rate cut from the Bank of England this week and if we’re right, that could take 10-year yields below 4% and present a clear downside threat for GBP/USD.”
MUFG is more positive on the Pound; “We judge that the balance of risks to be skewed to the upside for the GBP. If the BoE disappoints and leaves rates on hold then the GBP will strengthen further. On the other hand if the BoE cuts rates, the GBP will initially weaken but could quickly rebound once the dust settles supported by cautious guidance from the BoE over further easing. Markets and banks are expecting a very close call this time around, especially with a lack of commentary from some bank officials.
There is also a very high chance of a split vote. Hawkish members such as Haskel and Mann are not likely to vote for a cut while Dhingra and Ramsden will again vote to lower borrowing costs. The outcome will, therefore, depend on centrist members on the committee. There is a high degree of uncertainty over their votes, especially as this will be the first meeting for Lombardelli. According to RBC Capital Markets; "We've run out of ways to describe how close the decision will be.” Barclays (LON:BARC) added; “the ultimate decision remains highly uncertain. For example, the three voters which will be key for the decision have not made public comments in over ten weeks.”
HSBC (LON:HSBA) looked at the framework of the decision; “The debate in the market, and presumably within the BoE, is whether the deceleration in headline inflation will provide sufficient grounds for a rate cut even as services inflation and wages growth remain elevated.” According to Barclays; “we still except the MPC to deliver a hawkish 25bp cut in a finely balanced vote split of 5 to 4. First, we think the three crucial voters will be swayed by the broad constellation of data, which point to cooling inflationary pressure, rather than prioritising the recent upside surprises in services.”
Bank of America (NYSE:BAC) (BoA) added; “We expect the BoE to cut the Bank Rate by 25bps in August with a 5-4 vote, amid mixed data and a dovish stance. We acknowledge that is a close call.” Forward guidance will be a key element. According to BoA; “We think it is possible that it gives a signal that it would proceed with future cuts cautiously, given inflation persistence risks.” It added; “An increase in the medium-term inflation forecast, which is still below 2%, could implicitly guide towards a cautious cutting cycle.” MUFG commented; “We are expecting the BoE to deliver similar guidance to the ECB by indicating policy is not on a pre-determined path and they’ll continue to monitor inflation persistence risks.”
According to Credit Agricole (EPA:CAGR); “We note that at least some BoE-related negatives are in the price of the GBP by now given that the UK rates markets are already fully pricing in two bank rate cuts this year and a total of four rate cuts in the next 12 months.” It added; “In turn, should the MPC deliver a rate cut but maintain its data policy outlook rather than signal the beginning of a lengthy easing cycle, this could limit any GBP losses, especially vs the EUR in the wake of the policy meeting.”
According to HSBC; “For GBP, the balanced market pricing suggests a reaction whatever the outcome. However, with IMM data revealing a still historically stretched net long position in GBP, a cut might prove more provocative than unchanged policy.”
Unicredit (BIT:CRDI) expects the Pound will be vulnerable over the longer term; “We now expect the MPC to start cutting rates in September, but we continue to expect a total of 75bp of cuts this year, and a huge 175bp of cuts next year. This is a faster and deeper rate cutting cycle than financial markets expect. The reason for our dovish view is that the labor market is clearly weakening, and once unemployment starts rising it tends to keep going as an adverse feedback loop takes hold. The bank added; “Markets are already pricing in a BoE rate cut in September, which we also now expect. We therefore doubt that the GBP will benefit much if the BoE holds steady on Thursday.”
This content was originally published on ExchangeRates.org.uk
