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'Hawkish' Hold Most Likely At The Bank of England Rate Meeting, Say Experts

- The Bank of England meeting on Thursday is the next major event for Sterling 

- The most likely outcome is a 7-2 vote in favour of upholding the status quo, according to experts 

- Hints of an August or other 2018 hike could lead to movement in markets and strength for the Pound

bank of england MPC from nov 2017 compressor

Bank of England Monetary Policy Committee © Elif Miotti

Virtually rock-solid expectations that the Bank of England (BOE) would raise interest rates at the May 10 meeting this Thursday have given way to increasing doubt - first as a result of comments from the governor of the BOE which amounted to saying 'there are plenty more meetings in the year' and then worrisome growth data, which showed GDP slowing to a faint 0.1% pulse in Q1. 

From expecting a rate hike with 90% certainty markets now predict a hike with only 20% conviction.

As a result of much uncertainty now clouds the event: will the BOE ignore the data and raise rates anyway, will there be a mutiny against a dovish Carney, will everyone vote to hold, will it be a hawkish hold with references to an August hike which will be positive for the Pound?

Or, will it be a dovish hike with perhaps negative conotations for Sterling; will the worsening economic picture put a hike back in the box; will voting be the usual 7-2 split between McCafferty +1 versus the rest, or will it rise to 6-3 as a fresh hawk is born?

Minor differences aside, three outcomes appear to have emerged as most probable, according to the experts.

These are:

The first most likely outcome, standing head-and-shoulders above the rest, appears to be a fairly hawkish hold, with a 7-2 vote as previously, and hints - either subtle or not - that the expected rate hike has been delayed, perhaps till August, perhaps till later.

"We now expect the BoE to keep rates unchanged in a split vote at the May MPC meeting, having previously expected a hike to 0.75%. However, this is likely to be a delay, rather than abandonment, of the central bank’s plans to gradually normalize monetary policy," says Suan Teck Kin, head of research at Singapore based UOB Bank in an expression of the consensus.

"We expect a "hawkish hold" with no change in policy but a clear signal a hike is on the table for 2018. We prefer August but see notable risks the MPC could hike now instead of waiting," says Richard Kelly et al, at Canadian investment bank TD Securities in a note previewing the meeting, adding, "We expect a 7-2 vote with the MPC validating current yields as "appropriate"."

Kelly and his team apportion a 45% chance of this, their base case scenario happening. 

FX Strategist at ING bank Viraj Patel bemoans the polarising of the market's views at somewhat all-or-nothing extremes, which he says has been responsible for Sterling's recent wild swings, however:

"There is a middle ground – which we expect to be reiterated at May meeting; the combination of a 7-2 split MPC vote (2 rate hike dissenters), the Bank downplaying the soft 1Q GDP data and a reiteration by Governor Carney that another rate hike this year remains "likely”," says Patel, who also sees this as the most likely outcome.

The second most talked about outcome is a more hawkish hold with a variety of voting patterns, but probably a 6-3 vote and an extra dissenter joining McCafferty + 1 perhaps in the form of chief economist Andy Haldane or MPC member Gertjan Vlielghe.

"A subtle hawkish surprise for GBP markets would be a 6-3 MPC split vote – which would give greater support to an August BoE rate hike (which is currently 50% priced in)," says Patel.

Such an outcome would see Sterling rise to 1.3700 versus the Dollar from a current spot rate of circa 1.3500, argues the strategist.

(Image courtesy of ING) 

Since arch-hawk McCafferty is leaving soon (August will be his last meeting), a 6-3 vote may also give "greater conviction to the MPC's medium-term hawkish bias," says Patel.

Richard Kelly and team, meanwhile, sees a chance of 5-4 vote in their 'hawkish hold' scenario with a 7.0% probability of happening; for them, this would boost GBP/USD to 1.3780.

Any reference to the deferral of a hike until August is likely to be uplifting for Sterling and bond markets since the market now does not see a hike until December.

"With money markets now pricing a next rate hike for December, the yield on 10-year gilts has dropped almost 30 basis points from a February high of 1.69 percent," says Anooja Debnath, a reporter at Bloomberg

The third scenario, meanwhile, is for a unanimous vote in favour of keeping rates on hold. This is seen as the 'putting a back in the box' outcome.

This is likely to lead to a weakening in Sterling, with a fall to 1.3350 envisaged by ING's Patel and 1.3270 for TD Securities who apportion a 15% probability to it as an outcome.

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