The Bank of England’s latest policy decision is due this Thursday afternoon. This will be an opportunity for the central bank to set forth its latest assessment of the economy and announce/forebode any required changes to the monetary backdrop of the UK economy. Economic data has, on the whole, largely continued to outpace expectations with both growth and inflation coming in hot. Despite increasingly vocal opposition to the Bank’s currently accommodative policies and above-target inflation, it is unlikely that the Bank will alter current policy at all nor redraw its roadmap significantly at this meeting.
The most recent meeting of the Federal Reserve in the United States struck a dovish tone precipitating, amongst other factors, a weaker US Dollar as record-low yields continued to sap demand for USD. In noting promising growth at a time when markets were questioning the growth capacity of many major economies, the decision also unwound some defensive demand within USD and allowed it to weaken moderately. Given that the dovish Federal Reserve stance has left real yields at record lows in the US, a firmer tone from the BoE could alter the transatlantic fixed income gap and push demand into GBP. However, although possible, it is unlikely this will happen as the Bank of England on Thursday will likely note similar encouraging signals from the economy but stop short of any policy action to address rising inflation.
The Committee is one vote down from its usual nine members following the removal of an increasingly hawkish voice, former Chief Economist Andy Haldane. Within the committee, it remains likely and plausible respectively that Michael Saunders and Dave Ramsden will dissent from the decision to hold bond purchases unchanged. A more balanced composition of members within the QE vote could lead to a stronger GBP with a move to slow the asset purchase program signalling tighter policy sooner. In contrast, a lone voice of Michael Saunders versus his seven co-members would shift policy expectations further back, possibly pricing the 13-basis points worth of implied rate hike by mid-‘22 back out of the market. Overall, it seems likely that the Bank’s decision will challenge, rather than extend, GBP’s recent rally with markets likely to be wary of the downside risk’s moving into Thursday’s decision. As we covered yesterday, the labour market remains fragile and the 1.9 million people still being supported by the furlough program will be reason alone to leave policy unchanged.
Discussion and Analysis by Charles Porter