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Today’s Bank of England meeting will be the 82nd in a row in which rates have remained at 0.5%. There are good reasons why rates have remained low for that long and good reasons as well why the Monetary Policy Committee will continue to sit on their hands well into 2016. If the Bank of England meetings that have a Quarterly Inflation Report attached are known as ‘Super Thursdays’ then the ones without must, in my opinion, be renamed as ‘Snoozer Thursdays’.
The Inflation Report was notable in predicting that, with no rate rise in 2016, the Bank of England sees the chances of inflation exceeding its 2% target in three years as only 55% with kneejerk analysis seeing some push their expectations of when the Bank of England would raise rates out until 2017.
Thoughts coming into the November meeting were that the Bank of England was not particularly worried about emerging market growth and that inflation in the short term should gradually start to return close to target. The key takeaways, however, showed that this is not the case and that the first half of next year, despite the lessening impact of the oil/energy price slump on CPI, will not see reliable inflation pressures in the UK.
Language on the pound to be interesting
The pressures of a strong pound were very much part of this equation and the first thing that we will be looking for in today’s accompanying minutes will be any new thoughts on the pound given sterling’s decline at the hands of the European Central Bank.
Sterling is around 2% weaker on a trade weighted basis since the beginning of November and we would forecast that the Bank of England would be happy with the rebalancing of rate expectations that have resulted; bets on an increase in interest rates from the Bank of England next year surged yesterday and we are still very happy to still be calling for a rate rise in May.
Commodities and their currencies making all the news
Of course, oil is a harbinger for the Bank of England as much as it is a boon for consumers. There is nothing to say that another deflationary surge by oil and wider commodities is going to be the silver bullet that the world economy needs, far from it, but for Western consumers the picture does improve via higher disposable income. As we have made clear in the past, the pressure on corporates within the commodity sector is the scariest shoe to drop in 2016.
Overnight, markets have seen some volatility in commodity currencies continue. South African rand was down as much as 5.2% overnight following President Zuma’s decision to fire his Finance Minister.
We, and most in the currency sphere, have been negative on the ZAR for a long time. Monetary policy has tried to strengthen the currency – rates are up 50bps this year – and although inflation may normalise in the coming year, the SARB is stuck between a rock and a hard place. Fiscal policy is also rather aneamic at the moment; tax receipts are very poor from both personal and corporate areas.
NZD, however, has been an overnight winner despite the Reserve Bank of New Zealand’s decision to cut interest rates. Rates are expected to remain at 2.5% by the RBNZ and upgrades to the GDP outlook, alongside a weak USD, have helped NZD to strengthen on the day. The Bank’s language on the NZD’s strength is back although it seems that it wants the USD to help.
The Day Ahead
Today is also Swiss National Bank day and the movements outside of Switzerland have bought the Swiss National Bank a little more time on plans to devalue the franc. The decision by the European Central Bank to hold off on the massive expansion of its stimulus program that the market had been looking for will have had those in Zurich breathing a sigh of relief. We expect no movement from the SNB.