Hawks in control of the BOE
Today is the second ‘Super Thursday” of the Bank of England’s latest policy of releasing the minutes of its latest meeting and this quarter’s Inflation Report on the same day.
As we have made clear for a while now, the Bank of England is not expected to change policy at all today and should there be any fireworks it will be in the vote record and the subsequent economic projections.
Ian McCafferty will once again vote for a rate increase and there is the possibility that Members Weale or Forbes will join him. The latter’s recent comments have continued to emphasise that the Bank of England needs to start early if rate rises are to be as ‘limited and gradual’ as they would wish.
Inflation expectations should not have been damaged too much by recent emerging market wobbles and the Chinese revaluation, and therefore we expect inflation expectations of the medium term, the Bank’s two year policy horizon, to remain above 2%.
Sterling to remain in focus for policy
One common concern around inflation is the role of sterling. Despite the recent strength of the pound, particularly against the euro, sterling is actually a little weaker than it was before the August report on a trade-weighted basis. Export numbers within the latest manufacturing PMI were strong, though an overt tightening of monetary conditions by the Bank of England may be something to warn against given weakness elsewhere.
Likewise, current account issues – the difference between money coming into the economy and money flowing out – have been an issue for longer than Carney has been an ‘unreliable boyfriend’ and I think that the Bank of England, will veer away from direct comments on our investment position unless pressed at the press conference.
As for whether the BOE can hike before the Federal Reserve, I used to think that it was nigh on an impossibility but given the tightening of labour market conditions and the improved prospect of wages having a positive impact on base effect driven inflation, there is a lot to be said for the Old Lady of Threadneedle St. to lead the charge.
I discussed this all on Bloomberg TV this morning and you can watch the interview here
All in all, our expectations of a rate rise sit at May 16, and think that timeline will see tomorrow stabilise expectations, February’s QIR will signal that it is coming at the next meeting and a rise will happen in May.
Fed plough dollar stronger as December chatter increases
Calls for a December rate rise in the States were boosted yesterday by a phenomenal ISM number from its services sector. The probability of a hike from Janet Yellen and the FOMC rose as high as 58% yesterday following the second best reading in the past decade. Yellen’s comments to lawmakers yesterday that “the FOMC thought it could be appropriate to move in December” only emboldened this.
Throw this all together with a strong UK services readout and we had a rather bumper day for GBP/EUR yesterday as well. Chatter of tests of the recent highs – above the 1.44 level – are not without merit it would seem.