BoE Interest Rate Prep
On Thursday the 7th of August, at 07:00 ET, the Bank of England reveals their decision from it’s latest monetary policy meeting, and releases the rate statement.
Here are some views on what to expect.
General Expectations
Expectation from Analysts and Market Participants forecast the BoE to cut rates by 25 bp to 4.25%.
Investment Bank Commentary
Wells Fargo
The Bank of England (BoE) offers its latest monetary policy assessment next week amid an economic backdrop that is marked by slowing activity growth, but still elevated inflation and wage pressures. We expect the BoE to lower its policy rate by 25 bps to 4.00% (in line with the consensus forecast), but likely signal a continued gradual pace of monetary easing going forward.
U.K. GDP fell in both April and May, while more timely data showed a drop in the July services and composite PMI, suggesting only a subdued pace of growth going forward. Potential fiscal tightening at the government’s budget update later this year reinforces the outlook for sluggish growth. However, even as activity has slowed, inflation pressures have persisted, with June core inflation at 3.7% year-over-year and services inflation at 4.7%. Regular earnings for private sector workers also slowed less than forecast for the three months to May. As a result, we expect that the BoE’s updated CPI forecasts (based on market-implied interest rates) will show inflation decelerating toward, but not substantially below, the 2% inflation target over the medium term. In that sense, we expect the central bank’s economic outlook, as well as the forward guidance in its policy statement, to be largely consistent with a continued 25 bps per quarter rate cut pace at upcoming monetary policy meetings.
Bank of America
We expect the BoE to cut by 25bps at its meeting next week. We expect a divided committee with a vote of 2-5-2 (two votes for hold and two for 50bps cut). The tone is likely to strike a delicate balance between the trade- off the BoE is facing of still elevated inflation/ inflation expectations and softening growth/pay and labour market. Weak labour market/ growth and progress in pay should allow for a 25bps cut.
The overall message from June minutes was that the MPC is showing greater sensitivity to growth and labour market. There seems to be more conviction that growth is weak, the labour market is loosening (but not collapsing) and pay growth is likely to slow significantly. At the same time, BoE was worried about the impact of rising food prices as well as National Insurance Contributions (NICs) on inflation expectations and persistence. As a result, it continued to see two sided risks to inflation.
Data since shows elevated inflation/ inflation expectations and softening growth and labour market. Inflation picked up in June to 3.6% (20bps higher than BoE’s forecast), with services remaining flat at 4.7% and food prices remaining elevated, partly due to one-off factors. Inflation in Q2 was 10bps higher than the BoE’s expectation. PMIs showed a resurgence in price pressures in July. Business inflation expectations also rose somewhat in June in the Decision Maker Panel, which could be driven by higher energy prices which have now somewhat reversed, but nonetheless would be closely monitored. Medium term household inflation expectations as measured by the BoE/ Ipsos inflation Attitudes survey were flat in Q2, while they fell for the one-year ahead measure.
At the same time, data showed a softening labour market, with negative payrolls for the past few months and a pick-up in unemployment to 4.7% (10bps higher than BoE’s forecast). Progress in pay growth continues. Q2 private wage growth is on track to underperform the BoE’s expectation of 5.2%. GDP contracted in April and May and is likely to disappoint the BoE’s Q2 growth forecast of 0.25% while PMIs weakened in July.
