The Bank of England will announce the monetary policy decision of the MPC meeting today. We expect the MPC to vote 7-2 in favor of maintaining the bank rate at 0.50% – a repeat of the May vote – with Ian McCafferty and Michael Saunders continuing their dissent in favor of an immediate 25bp hike. The meeting is likely to be uneventful, with a majority of MPC members wanting to wait for more data ahead of the August Inflation Report, when a more thorough assessment will be made.
Back in May, the MPC judged that the weakness in the first quarter of 2018 GDP was likely a “temporary soft patch,” but a majority of MPC members wanted to wait to see how the data unfolded over subsequent months for confirmation that growth had picked up in the second quarter of 2018 before sanctioning a hike.
Data releases since then have been mixed. On growth, the jury is still out on how much of the weakness in the first quarter of 2018 is temporary. Headline PMIs rose, with the composite PMI rising 1.3 points to 54.5 in May, but the details were weaker. The “hard” activity data for April was mostly weak, with industrial production, manufacturing, construction and the trade balance uniformly disappointing. There was some better news on consumption: net consumer credit recovered in April (to GBP +1.8bn – above its six-month average – after the very weak GBP +0.4bn in March), retail sales rebounded (+1.3% mom and +1.8% mom in May and April, respectively, after the weather-induced fall of 1.1% mom in March) although some temporary factors were responsible, and consumer confidence improved slightly in May (to -7 from -9). Set against this, however, the housing market showed further weakness.
On inflation, the headline CPI rate was unchanged at 2.4% yoy in May, in line with the projection in the BoE’s May Report. Core inflation was also unchanged at 2.1% yoy. The labor market report for April was mixed, with strong employment growth offset by the renewed weakness of wage growth. Indeed, the three-month-on-three-month private sector regular pay growth measure has been languishing at 2.3% annualized for three consecutive months, down from 3.5% in November 2017. Since January -April is the key wage-setting period in the UK, the weakness is likely to endure.
On 10 May, the BoE Governor Mark Carney said, “It’s likely over the course of the next year that interest rates will go up, likely by the end of the year.” However, the majority of members have been less committed on timing. Silvana Tenreyro said on 4 June, “While I anticipate that a few rate rises will be needed over the three-year forecast period, the timing of those rate rises is an open question.”
While the MPC continues to judge that “gradual and limited” rate rises will be needed over the forecast period, we think that BoE is likely to remain on hold until November, given dovish stance of the ECB.
by MyFXspot.com, macroeconomic research for forex traders