By Orbex
The Bank of England will be holding its monetary policy meeting later today. Investors at large expect the central bank to keep rates steady at 0.75%. The BoE’s meeting is gaining prominence after months of Brexit uncertainty. The central bank had been pushed to the sidelines as investors were watching the Brexit saga unfold.
With Brexit now postponed to October, focus will once again shift back to Threadneedle Street. The UK economy had been overshadowed by the Brexit headlines, but that is now set to change.
With more than six months left for UK lawmakers to agree on a Brexit deal, the question is how the Bank of England will guide the markets.
Will the BoE issue hawkish forward guidance? Will rates rise one more time before the October Brexit deadline? These are just some of the questions playing on investors’ minds ahead of the meeting.
The short term money markets do not see any rate hikes until 2021.
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The monetary policy committee is forecast to leave rates steady, but there could be some dissenting votes. The MPC is also forecast to leave the central bank’s asset purchases steady by a unanimous vote as well.
The markets are somewhat mixed into the event. The National Institute of Economic and Social Research (NIESR) suggests that the central bank will hold off from rate hikes at least until 2020. The estimates come as the UK’s inflation has seen the underlying pressures building up over the past few months.
While inflation continues to hover near the BoE’s 2% inflation target, growth in the UK is sluggish.
Due to the lack of any policy changes at today’s meeting, focus will turn to forward guidance. And policymakers will also be releasing the updated growth and inflation forecasts today.
The central bank is faced with a mixed set of economic data. Inflation is close to the BoE’s 2% target rate and wage growth is accelerating to an 11-year high. But growth, as measured by GDP, remains weak. There are calls for the UK to end its austerity measures. Recent lending data revealed that the UK government was borrowing less. However, market watchers estimate that this could end sooner rather than later.
The UK’s borrowing costs could rise more quickly than anticipated, a report from NEISR recently showed.
NIESR estimates that the UK will grow at a pace of 1.5% while inflation is forecast to average around 1.8% – 1.9% until next year.
Consumer prices in April were unchanged at 1.9% for the second consecutive month. Meanwhile, core inflation eased to 1.8% recently.
Any forward guidance from the Bank of England will still depend on the outcome of the Brexit negotiations. NIESR’s estimates, for example, are based upon a scenario of a smooth or a soft Brexit.
Some estimate that the BoE could signal the markets for a rate hike in August. But this is left to be seen on how the Brexit talks progress. The pound sterling has been trading in a range due to lack of progress on Brexit.
Therefore, the impetus shifts to the BoE to provide some guidelines for the markets into the next quarter.
Besides the monetary policy aspects, the UK is also now actively searching for a replacement for the incumbent, Mark Carney. Carney’s term was originally slated to end in the summer of 2018.
However, due to the Brexit uncertainty, Carney extended his term as the governor of the Bank of England. With the extension set to end in January 2020, the UK government formally announced its search for a replacement at the Bank of England. There are a number of front runners, both from the BoE’s current MPC set up as well as external candidates.
With a possible change of guard around the corner, the BoE’s task remains important as it will need to steer the Brexit uncertainty and upcoming changes to the central bank’s leadership.
By Orbex