Welcome to our rolling coverage of today’s BOE Rate Decision, meeting minutes & inflation report (1200 GMT). Previews, live coverage and reaction below…
15.00 (GMT) BOE Review
The BOE’s “Super Thursday” passed as we anticipated with the BOE voting to keep rates unchanged at 0.50% . The voting itself however did surprise as the previous 8-1 vote flipped to a unanimous 9-0 decision with long-time hawk Ian McCafferty resigning his Hawkish vote citing weak wage-growth and low inflation.
The accompanying statement provided a familiar assessment of the economic picture citing continued risks from the slowdown in emerging markets and global headwinds which gave the Bank cause to lower the domestic growth forecast for 2016 to 2.2% from 2.5% in November whilst stating that risks to growth lie on the downside.
Despite a lowered growth outlook the Bank did say that they see a slight pickup in global economic growth though they also foresee a further slowdown in China over the next three years.
Inflation, as expected, is forecast to remain low over the near term, averaging just 0.8% in 2016, though the BOE do forecast inflation to rise over the 2% target by 2018 expecting that inflationary pressures will subside as global head winds dissipate.
With the BOJ and ECB having both recently cut rates further, investor expectations have been building for a potential UK rate cut on the horizon.When questioned about the prospect of this move however, BOE governor Mark Carney dismissed the idea stating that the the next move on UK rates will “more likley than not” be to the upside. Investors meanwhile remain unconvinced with market pricing showing the probability of a cut this year now outweighs that of a hike and just a quarter point increase not orecast until 2018.
Reaction to the event was GBP negative and although movement against USD was muted in the wake of recent dovish comments by the Fed, GBP fell sharply against the other majors.
Trade Ideas Update
The GBP negative reaction didn’t trigger my EURGBP idea so for now I am sidelines
11.50 (GMT) 10 minutes to go
Bloomberg – “With short-end U.K. rates now pricing the possibility of some Bank of England easing, Governor Mark Carney and the Monetary Policy Committee will walk a fine line on Thursday by highlighting downside risks while challenging rate path expectations two to three years ahead, economists say.
The pound faces a risk of a short squeeze this week as investors have already scaled back expectations for the timing of a rate increase, analysts say. The BOE rate decision, minutes and Inflation Report are due on Thursday at 12pm U.K. time while the press conference is scheduled to start 30 minutes later.”
11.40 (GMT) Institutional Views
Pantheon Macroeconomics – “We think that the monetary policy committee will revise up its [medium-term] inflation forecast, which in November already was the highest at the two and three-year horizons since February 2013 and August 2005 respectively…
On the committee’s new forecasts, [Bank of England Governor] Mark Carney’s three criteria for a rate hike — a further reduction in slack, a continued firming of domestic cost pressures, and core inflation moving “notably” towards the target — are all likely to be met by the second half of this year, at the latest…
We still think the MPC will tighten twice this year, with the most likely months for rate rises now appearing to be August and November.”
11.30 (GMT) View On Twitter
11.25(GMT) Institutional Views
Nomura – “At noon on 4th February, the BoE will announce its latest monetary policy decision and publish both the minutes of the monthly meeting and the quarterly Inflation Report. There arethen slight gaps before the press conference (12:30pm, instead of 12:45pm previously and noon originally) and economist briefing (2:30pm) begin.An unchanged decision is unanimously expected, despite this having previously been the firm consensus date for the first hike among economists. Only Ian McCafferty is likely to vote tohike at this meeting, which would merely be maintaining a longstanding dissent. Kristin Forces and Martin Weale remain the next most hawkish members in our view, but their recent statements do not indicate imminent dissenting votes. A more likely development would be for Ian McCafferty to drop his dissent or for Andy Haldane to strengthen his arguments for easier policy potentially being needed in future. However, we do not expect this to occur. In any case, the leaning of the core internal members is better illustrated through the inflation forecasts, so we still focus there.
News over the past few months has been similar to the shocks that drove the November Inflation Report. A disinflationary oil price shock has little effect on the 2-3yr horizon that policy influences, but the shock still affects policy.
The MPC is looking to spot price/wage inflation numbers for confirmation that the underlying pressures are becoming too strong. A longer period at low levels makes the proof more elusive, dissuading a hawkish signal
Inflation forecasts made under Governor Carney are consistently close to 2% in 2yrs, irrespective of news or market pricing, which has moved hawkishly on only one of 10 Inflation Report days. We doubt things will be different this time.”
11.20 (GMT) View On Twitter
11.10 (GMT) Trade Ideas
EURGBP Buy .7485 Stop .7385 target 78
With broader issues weighing on GBP such as “Brexit” concerns, market volatility and risk-sentiment, a retest of the base which formed in EURGBP over the majority of 2015 should see strong demand kick in to take price higher once more. Long into those broken highs targeting a move into 78.
10.50 (GMT) Expectations For This Meeting
- Short Term Inflation Subdued, Medium Term Inflation?
The Dovish leaning of the BOE at this stage is well established given the tone of recent meetings and as such Thursday meeting, report and minutes are unlikely to mark a departure from this message. The continued slide in Oil prices is clearly a big problem and is keeping the global inflation outlook subdued. As such a downward revision to the short-term domestic outlook is likely though the medium-term outlook is not so clear with the January MPC minutes highlighting that members now foresee CPI inflation picking up “slightly more gradually” than forecast in November. Members will be pleased to note that inflation was at least in line with the 0.1% forecasted in November. The BOE have also noted that whilst continued Oil weakness is negative for inflation in the short term it should be positive for UK growth in the medium term as it feeds through into stronger consumer spending.
- Spare-Capacity Reducing
Similarly the level of spare capacity in the UK economy has reduced beyond levels forecasted in the November report with unemployment hitting a ten-year low at 5.1%. This development would be more pleasing to the MPC however, if wage-growth had continued with the positive momentum displayed over last summer when it struck 6 year highs. Wage growth momentum has reversed however and fallen back to 2%, levels in line with January 2015, removing a key driver in the argument of those who last year were calling for a sooner-than-expected UK rate rise and indeed disappointing the MPC, with Mark Carney having previously commented that he would like to see wage-growth above 3% for considering a rate-hike.
- Growth Under-performing
GDP growth has also underperformed the forecasts set out in November printing 0.5% in the fourth quarter and also hitting a three year low in the annual figure. Global growth risks stemming from the slowdown in emerging market economies alongside Brexit concerns, continued energy price weakness and global financial market volatility all weigh heavily on UK growth and again, downward revisions to at least the short-term outlook appear likely.
- Sterling Strength Recedes
Alongside the diminished spare-capacity in the UK economy the MPC will also be pleased to note the diminished strength of Sterling as measured by the Trade Weighted Index which is down almost 7% from the November report and well below the forecasted 92 level. Sterling strength is commonly cited as a threat to the UK inflation outlook so this depreciation will be welcomed though is not likely to affect short term forecasts much with the MPC’s own analysis of the pass through effects on inflation from the exchange-rate suggesting the transmission takes several years.
- Balanced Forecast The Most Likely Case
With expectations so heavily tilted to the Dovish side ahead of this release and market pricing so extreme (rate hike not priced in until November 2017) it is unlikely that any dramatically Dovish forecasts are likely to be seen and in-fact we could see some upward revision in the medium-term outlook space. This is not to say a Hawkish forecast is expected because a) risk factors are still so prominent and b) the BOE are likely to wait until it is certain that inflation pressures are building before shifting the tone of its messages. The most likely outcome appears to be Dovish message in line with recent output, whilst acknowledging some improvements since the last inflation report the likelihood of some further improvement around the medium-term horizon.
- Reactions & Rates
Certainly worth noting that of the ten inflation reports Mark Carney has delivered, only one of those reports has fuelled a move higher in UK rate-pricing, and as such a Dovish reaction is is the most likely outcome though the extent of this reaction may be muted given prospect of upward revisions to the medium term picture.
10.30 (GMT) BOE November Inflation Report
Importantly, this meeting also includes an update of the BOE’s quarterly inflation report, a chance to check in on how the outlook has developed against that forecast and also provide updated forecasts for the next quarter and beyond.
Forecasts to focus on from the November report
Q4 CPI Inflation 0.1 outcome = 0.1
Q4 GDP Growth 0.6 outcome = 0.5
Q4 Unemployment 5.3 outcome = 5.1
Sterling Trade Weighted Index 91.3 outcome = 88
Oil Prices 32.5 outcome = 21.5
10.15 (GMT) Data Flow Since January Meeting
With just three short week’s having passed since the last meeting we haven’t had much in the way of new data
On the positive side:
- Dec CPI data showed inflation improved MoM, was in-line with expectations YoY and beat expectations YoY in Core inflation
- The Unemployment showed a further contraction, falling to 5.1%
- 4Q GDP Printed in-line with expectations at 1.9% YoY and 0.5% QoQ
- Public Sector Net Borrowing was lower than expected in Dec
- Mortgage Approvals were better than expected in Dec
- Manufacturing PMI Jan was above expectations
On the negative side:
- Retail Sales were well below expectations in Dec
- Construction PMI Jan was below expectations
- Average weekly earnings contracted again, falling back to 2% from recent highs of 3%
- Net Consumer Credit was below expectations in Dec
10.00 (GMT) Notes From January Meeting
The Bank Of England’s January meeting was an expectedly lack-lustre affair with the BOE maintaining the Dovishness of recent meetings as they acknowledged continued market volatility, global growth concerns and sliding energy prices. The BOE also noted that whilst declining energy prices weigh on inflation in the near term they may also support domestic spending which, along with investment, remains healthy. However, credit growth and productivity were both said to be “disappointingly low”.
Notably the meeting wasn’t as Dovish as some were expecting and talk that the BOE’s “Lone Hawk” Ian McCafferty was going to resign his vote for a hike proved to be unfounded as voting remained unchanged 8-1 in favour of rates on hold.
10.00 (GMT) Welcome to our coverage of the BOE February meeting
Hello and welcome to our live coverage of today’s BOE Meeting. Here are the key details for the day:
- Thursday February 4th 1200GMT
- Current rate 0.50%, expected unchanged
- Quarterly Inflation Report to be updated
- Meeting minutes to be release
- Press conference to follow