What Are The Chances Of A Surprise From The BOE?

August 4, 2021

The BOE was once one of the more “hawkish” of the major central banks.

But, that has gone by the wayside with the rise of covid over the last month. Now, the consensus is leaning towards a more dovish stance in the short term.

In fact, UK economic data has underperformed, as businesses are still worried about a return of restrictions. After announcing a lifting of (most) restrictions during the so-called ‘freedom day’, UK authorities have vacillated about the potential return of restrictions due to the delta variant.

Additionally, Chancellor Sunak has hinted that we should expect higher taxes in the future to reduce debt.

So how can the BOE’s decision and the situation in the UK affect the markets?

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Where things are going

Covid deaths are still on the rise, but that’s somewhat of a lagging indicator.

Specifically, covid cases in the UK are already declining, presaging that hospitalizations and deaths will follow suit in the coming weeks. This could bring back optimism to the markets.

However, the BOE is meeting before that.

As it stands, MPC members have at least publicly insisted that they don’t believe the surge in the delta variant will have so much of an impact to warrant adjustments in policy. And, given the recent data, the general understanding is that the BOE will keep the current policy in place.

It’s down to the vote

Nonetheless, we can’t be too sure about what’s going to happen.

Normally, the BOE doesn’t provide formal guidance, and analysts have to rely on a combination of inflation predictions and committee votes to try to forecast policy. This time around, it seems that analysts are placing the most attention on the vote count.

The consensus is for a unanimous vote to maintain the interest rate.

But where things might move is in response to the vote over whether or not to end the QE program immediately, or let it phase out. On this issue, the expectation is for a vote split of 6-2.

Why it matters

Both Saunders and Ramsden have publicly called for an end to the QE program, so economists expect them to vote in favor of the decision at the meeting. Additionally, they anticipate the rest of the board to hold.

However, if there were one or two additional votes to end the program (say, from Broadbent or Cunfliffe, the more hawkish-leaning of the “neutral” members), this would be a sign that tightening is coming up sooner than we expect.

Therefore, the pound could move quite significantly higher since this would be a big surprise for the markets.

On the other hand, should the vote come in as unanimous, then we could see the pound weakening and the FTSE 100 gaining.

Overall, the market is more inclined towards easing, so the reaction might not be as strong.

It’s not uncommon for members to call for a certain tightening policy, and then not vote for it at the meeting. This is especially true when there is new data coming out that provides an excuse to wait another month to change policy.

However, the chances of either of those two scenarios are deemed to be quite low, with the market pricing in no change in policy at all.

By Orbex