The following article was written by Jasper Lawler, Senior Market Analyst at FCA regulated broker LCG.
The BoE will give its highly anticipated interest rate decision on Thursday. Despite all the uncertainty surrounding Brexit, the central bank is widely expected to raise interest rates by 0.25% to 0.75%, a move which had initially been planned for May but was cancelled after a weakening in the economy; and a move that is currently 90% priced into the markets.
The return of the unreliable boyfriend?
Whilst the markets are almost completely certain of a hike, there are plenty of reasons why the BoE could hold off from raising interest rates. Economic data, whilst an improvement on Q1, remains uninspiring, which when combined with the political outlook could mean that Carney & co. will adopt a wait and see approach. This would be a repetition of May, and cement the title of unreliable boyfriend for Mark Carney; a criticism that he would most likely wish to avoid. With this in mind, the BoE are looking fairly boxed in.
Hike to reverse?
Should the BoE move on interest rates, this will be the first time in a decade that rates will be above 0.5%. But how long will they stay there?
There is an increasing feeling that the BoE are looking to raise rates, not so much because the UK economy is giving off signals that it is in an optimal position for rates to be hiked, but more because it wants to create some room to cut rates in the increasingly likely event that the UK crashes out of the EU without a deal. Why else would you look to raise rates when both growth and wages are subdued and inflation falling towards the BoE 2% target? There has been plenty of time to normalise rates in the last ten years, so now seems an odd time to prioritise normalisation.
Forward guidance & vote split
Given that the pound has almost completely priced in the hike, investors will be listening carefully to the forward guidance and the vote split to assess whether this will be a one and done dovish hike, or whether there is likely to be a second hike later in the year. Whilst a rate hike on Thursday is 90% priced, another increase is not expected until August 2019.
Unreliable BF part II
Should Mark Carney, the unreliable boyfriend make an appearance again and the BoE pull back from hiking, preferring a wait and see approach until November, the pound is likely to tumble. A test of the $1.30 level on the day of the meeting seems very plausible if there were no hike.
If we see another dovish hike, similar to what we saw in November, where the lift in interest rates was accompanied by very cautious comments from Carney, plus evidence that the MPC was not unanimous in its vote to hike, then there is a good chance that the pound could actually fall lower following the meeting.
A 5-4 vote split would itself be a disappointment and could see the pound drop lower. With a 6-3 vote split or better we expect the pound to rally. Whether that rally is able to last is questionable given the Brexit clouds gathering on the horizon.
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