boe jun 19 rate decision - preview
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-          BoE MPC expected to leave rates & QE on hold

-          Outside risk dissenters seen calling for hike in coming months

-          Hawkish chatter drowned out by dovish noise abroad

-          MPC focus remains on domestic demand pressures

-          Slowing growth dynamic puts current bank forecasts at risk

-          Rate decision due Thursday at 11.00 GMT


London, 18 Jun (LS NEWS) -- The Bank of England is trying to convince the market it is still on a hiking path while the rest of the G-7 central banks ramp up their rate-cut rhetoric.


The BoE’s Monetary Policy Committee (MPC) is expected to leave its bank rate on hold at 0.75pct on Thursday and maintain its stock of UK government and corporate bond purchases at GBP435bln and GBP10bln respectively.


Despite certainty among analysts that rates will remain on hold at the June meeting, less predictable is the composition of the voting. Consensus is for 9-0 unanimous decision to keep rates on hold, but this belies the belief among observers that a couple of the more hawkish members are ready to signal their desire to see a higher bank rate. External Member Michael Saunders, Chief Economist Andy Haldane, and Deputy Governor Ben Broadbent are seen as the most likely to vote for a hike at the June meeting.


Broadbent told the Treasury Select Committee at his reappointment hearing on the 11 June that according to bank’s current guidance if economic forecasts come to fruition—conditioned on a smooth Brexit—the bank rate would need to raised faster and further than markets were pricing at the time of the last month’s meeting.


This sentiment was echoed by Saunders, who said policy will need to be more restrictive. “I expect that any policy tightening is likely to be to a limited extent and at a gradual pace. But we probably would have to return to something like a neutral stance earlier than markets project.


“There would be costs if we delay tightening until all the potential warning signs across pay, capacity and prices are flashing red.”


Yet, despite the hawkish rhetoric from members of the committee, data doesn’t appear to support the rate hike discourse and the markets seem far from convinced.


Following outperformance during the first three-months of the year, UK activity began Q2 with a GDP contraction of 0.4pct in April, led by declines in production and the manufacturing sub-sectors. Rolling three-month growth slowed to 0.3pct in April after a rise of 0.5pct in Q1.  


Commenting on the last week’s release of the GDP data, the Office of National Statistics said, “GDP growth showed some weakening across the latest 3-months, mainly due to a dramatic fall in car production, with uncertainty ahead of the UK’s original EU departure date leading to planned shutdowns.


“There was also widespread weakness across manufacturing in April, as the boost from the early completion of orders ahead of the UK’s original EU departure date has faded.”


By the time the MPC convenes for its last day of discussions, it will have seen the latest CPI data for May (released Wednesday, 19 June). For April, headline CPI edged up to 2.1pct y/y from 1.9pct, just above the BoE 2.0pct inflation target. For May, analysts expect annual CPI to edge higher to 2.2pct.


With employment at a record high, the tight labour market has continued to elevate wages. In the three-months to April, regular pay rose by 3.4pct y/y and was up 1.5pct y/y in real terms.


TS Lombard’s Konstantinos Venetis expressed concerns that rising inflation expectations create a messaging issue for the MPC.  “Essentially what the market seems to be discounting is a stagflationary outcome in which the bank largely looks through a currency-induced jump in inflation. The chief reason behind this configuration is persistently high uncertainty surrounding Brexit and domestic UK politics more generally.


“This context presents the bank with a difficult communications challenge just when officials wanted to stay patient for longer and assess the incoming economic data. The MPC can do nothing either about Brexit or investor pessimism, but it remains sensitive to signs of inflation expectations becoming dis-anchored and potentially jeopardising its credibility.”


Following May’s rate decision and inflation report, market expectations priced in a single hike over the two-year forecast horizon. Subsequently, markets have now priced in a cut.


As the bank itself stated in its latest Monetary Policy statement, its decisions will be dependent upon the economic reaction to the nature and timing of the UK’s withdrawal process from the EU, and in particular the new trading arrangements between the customs union and Great Britain. With the new deadline at the end of October 2019, the bank cannot be certain of anything ahead of this date.


Citibank Analyst Tiia Lehto said, “The value of the BoE’s guidance is clearly diminishing as Brexit uncertainty looks set to remain high even if no-deal Brexit is serially avoided and markets therefore question the bank’s economic forecasts. In addition, the global monetary policy wind is blowing in a dovish direction, which is so far not reflected in the BoE’s forecasts or communication.”


It looks like the MPC will have to work hard to convince markets of its rate hike bias.


--- Harry Daniels

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