'Super-Thursday' at the Bank of England Dominates the Outlook for GBP

The Bank of England simultaneously publishes its interest rate decision, policy meeting minutes, and Quarterly Inflation Report forecasts (QIR) on Thursday the 6th of August.

Bank of America Merrill Lynch Global Research have dubbed the event ‘Super-Thursday’ - currency markets will get their clearest view yet on the timing of that all-important first interest rate hike and the pace of subsequent rises.

The recent strength of the pound sterling against a basket of currencies has been primarily driven by expectations concerning interest rate rises.

Strenght in sterling has been reflected by currency markets now beginning to even price in the probability, albeit still a minimal one, of a November 2015 rate hike.

The consensus view is however seen crystalising around a February lift-off with the Bank of England emphasising the need for gradualism. Gradual rate hikes are important for stability - particularly for the business community.

Super-Thursday Paves the Way to a February 2016 Rate Rise

Robert Wood, UK Economist with Bank of America Merrill Lynch, has suggested the BofE will likely highlight that the economy looks stronger than it did three months ago.

Growth bounced back to 0.7% QoQ in 2Q, slightly better than the central bank had projected.

“Productivity looks perkier. Faster supply growth could in principle mean weaker inflationary pressures. But probably not in this case as wage growth has picked up smartly too. The expansion seems to be gradually shifting onto a more sustainable footing,” says Wood.

There are probably fewer reasons to think inflation will undershoot the 2% target by any significant margin in the medium term.

It is expected by Wood and his team that lower oil prices and the higher value of sterling will likely lead to a cut in the BofE’s very near-term inflation forecasts.

“Assuming oil prices stay where they are, inflation could bobble around 0.1% until October. That probably rules out a November hike,” says Wood.

Indeed, “some” members of the Monetary Policy Committee (MPC) said in the July minutes that the risk of inflation rising above the target in the medium term had risen.

Inflation is therefore less of a reason for the BofE to try and fight the recent upward move in market interest rates (and by extension the increasingly rich value of the pound).

“Our call is for the first 25bp BoE hike in February next year, followed by hikes of the same magnitude in August and November,” says Wood.

As mentioned, there is an increasing tendency for some in the market to price in the prospect of a November rate hike. (Lloyds Bank and UniCredit are two leading institutions pricing in a Nov hike).

Such a bullish stance may be overly optimistic though warn Bank of America who cite inflation as being too benign to warrant any significant aggression.

More Members to Vote for a Rate Hike

On the interest rate decision, BofA Merrill Lynch are not along in looking for a 7-2 vote to keep interest rates on hold.

Many market commentators are looking for Martin Weale and Ian McCafferty voting for a hike.

Analysts do not expect David Miles to have called for a hike but it would mean little even if he does as Miles will be replaced by Gertjan Vlieghe at the end of the month, who has said nothing publicly about the UK for years.

Any further names on the list could prompt a kick higher in the pound sterling purely owing to the surprise factor.

“A more hawkish signal to watch out for would be one of the other Committee members – Kristin Forbes perhaps – voting for a hike,” says Wood.

A New Way of Doing Business

On Super-Thursday the BofE will shift to a new publication schedule for the first time, whereby it releases minutes of its policy meeting, the interest rate vote, and the QIR at the same time.

Analysts believe the immediate reaction may depend on what is deemed more important: the August vote; or the two-year ahead inflation forecast?

In the past it has not been unusual for the minutes to send a different message to the earlier QIR and associated press conference.

“The only change is that those potentially conflicting messages will be published together. Mark Carney will have an opportunity to clarify the situation at his press conference, which starts 45 minutes after all the information is published,” says Wood.

Another way for the BofE to signal a slightly hawkish tilt would be to partially remove the downside growth and inflation risks it factored into its May forecast.

The growth risks reflected “the possibility of a disorderly outcome to the current Greek negotiations”, while the inflation risks were driven by the possibility of past low inflation being reflected in weak wage pressures.

Greek-related risks will have surely faded in the BofE’s models, while its latest policy meeting minutes stated that, “recent developments had diminished the risk that low rates of current inflation would feed through into wage settlements.”

“We look for the risks to be cut a little, although not completely, which is a view we have factored into our expectations above for the BofE’s mean inflation forecasts,” says Wood.

Bank of America expect the big picture to be a central bank that is a little more confident in the sustainability of the recovery and in prospective inflation pressures.

“As such, we expect no push-back on the higher interest rate curve on which it will be conditioning its forecasts. Very low inflation in the near term should be enough to keep the Committee on hold till February, however,” says Wood.