No one expects Super Thursday
Bank of England decision day has long been a complete snooze fest; rates have remained on hold at 0.5% for over six years, while we have not seen an increase in quantitative easing since 2012. Today changes all that, lumping all the structured announcements due from the Bank of England in August into one ungodly policy mix.
There will be volatility, likely some whippy pound moves and certainly a couple of exasperated sterling analysts propping up the bar at the Dog & Duck come the close of play. Today could very easily represent a starting gun on Bank of England rate rises and I think that there are five key things to bear in mind once the announcements drop onto news wires.
Who will be the first mover?
Primarily it is about the voting record at today’s meeting. There is a small but unlikely chance of a policy shift today and so we must look at who, if anyone, will have voted for a rate increase at this month’s meeting. Market consensus seems to suggest that only Martin Weale will raise his hand for a 25bps increase. I think that we can reasonably say that at least two members of the MPC will have voted for higher rates – McCafferty and Weale both voted for 25bps increases between August and December of last year – and I think that they will act in a similar manner this time round. Sterling will get a significant bid higher if a member of the undecided middle (Members Shafik, Forbes, Broadbent or Cunliffe) decide to join in the calls for an interest rate increase. Much like Dennis Lockhart’s calls from the centre of a Fed rate rise in September, these are truly the floating voters
Projections
Secondly we must look at the new projections for inflation and wages within the Inflation report. Inflation is likely to be revised lower in the short term as the Bank takes into account further falls in the oil price but little impact is likely in the medium term of two to three years. We can also expect calls for higher wages by the end of the year as the Bank maintains its calls for the second half of the year to see faster expansion than the first.
Is the pound too strong?
Third point to watch out for is the Bank’s thoughts around the value of sterling. The most telling statistic in Monday’s manufacturing PMI survey was that it saw the fourth consecutive month of declines in export orders. GBP is up around 13.5% against the euro in the past 12 months, damaging manufacturing competitiveness in the UK’s largest market. Rate rises by the Bank of England are only going to drive this knife in harder.
After you Janet
Fourthly, we must look at risk elsewhere. The IMF has warned the Federal Reserve a number of times in the past six months that a normalisation of interest rates risks sending shockwaves through emerging markets. Market sentiment is still fragile despite the howling from China and Greece quietening down somewhat in the past few weeks. I do not expect the Bank of England to raise rates before the Federal Reserve but we must continue to imagine that both the minutes and the Inflation Report will emphasise the ‘low and slow’ attitude to rate rises.
Controlled reaction
Finally, there are 45 minutes between all the data being published at noon and a press conference led by Mark Carney. Will the Governor take the opportunity to slap down any sterling exuberance from a 6-3 or 7-2 split?
Elsewhere
Away from the Threadneedle St. navel gazing the main news today has been a spike higher in the euro following a surge in German factory orders. Orders rose by 7.2% compared to this time last year, backing up the news in yesterday’s US trade report that the US’s trade gap with Europe had climbed to a record on greater imports. You can thank EUR/USD for that.
USD also tripped higher once again despite a poor ADP jobs number. Employment in the US’s non-manufacturing sector increased the most on record in July – the Fed wanted signs of stronger job creation before raising rates. They got it yesterday.
