Bank to Decide Policy on Thursday: All Eyes Will Be On Accompanying Statement
The Bank of England’s Monetary Policy Committee (MPC) is set to conclude its latest meeting on Thursday, delivering its first rate decision since voting to raise interest rates to 0.75% in August.
Barring any major Brexit developments, the meeting is likely to be the main catalyst for movement in Pound exchange rates for the remainder of the week and depending on what is discussed could potentially set the tone for Sterling over the coming months.
Having just raised interest rates to their highest levels in almost a decade, it appears highly unlikely that the Bank of England (BoE) will look to make any policy changes this week, with most analysts forecasting a 9-0 vote in favour of holding steady.
BoE Governor Mark Carney previously suggested in August that rates will continue to rise over the next couple of years, but was clear to stress that hikes would be ‘limited’ and gradual’.
With the bank likely to stay its hand this month, the focus will instead be on the policy statement, with markets looking for any hints of how interest rates may move in the coming months.
However if GBP investors were hoping for a hawkish tone from the bank it looks likely they will come away disappointed
In fact, in the wake of some lacklustre UK data, including August’s weak purchasing managers index (PMI) readings, many analysts are speculating that it could be some time before we see another rate hike from the bank.
Howard Archer, chief economic adviser at the EY ITEM Club, said:
‘The mixed set of August purchasing managers indices reinforce belief that it will be some considerable time before the Bank of England raises interest rates again after August’s hike from 0.50% to 0.75%.
Carney’s Tenure at BoE in the Spotlight
While this week has brought some more positive data, with UK wage growth shown to have jumped to 2.9% in the three-months to July, this is not expected to offset the bank’s caution regarding Brexit, with Carney frequently warning that the uncertainty of Brexit negotiations is having a negative impact on growth.
While there has been some positive progress on this front in recent days, with the EU’s chief negotiator Michel Barnier suggesting a deal could be agreed by November, it appears unlikely the BoE will be willing to make a move until policymakers have a clear picture of what the UK’s future outside the EU will look like.
Archer adds: ‘It looks unlikely that interest rates will rise again until after the UK leaves the EU in March 2019 given the major uncertainties that are likely to occur in the run-up to the UK’s departure.’
Nevertheless, in the central bank’s accompanying Q&A, Mark Carney is expected to be quizzed about his extended tenure in charge of the BoE.
Sterling sentiment soured earlier this week as it was announced that Carney would remain at the helm until January 2020, with many GBP investors feeling disappointed that he would not steer the bank through the entire Brexit transition period.
Dovish Outlook Set to Limit Sterling to the Downside
Overall our forecast is for the BoE’s rate decision to result in a slightly weaker Pound, with a dovish outlook from policymakers in the face of ongoing Brexit anxiety likely weighing on Sterling sentiment to the downside.