Haldane's Vote Key Trigger for Pound Sterling at Bank of England's September Meeting

For Pound Sterling, near-term focus lies on the Bank of England and the split in votes on the Monetary Policy Committee as to whether or not interest rates should be raised.

The Pound shot higher against most major currencies after it was shown UK inflation data for August was at 2.9% on an annualised basis with markets betting the Bank of England might have to raise interest rates sooner than they would have liked.

The Overnight Index Swaps market has already rushed to price in a greater probability of a rate hike from the Bank by year-end, implying a 30% chance of a hike in December, this compares with 20% a week ago.

Most economists do not expect an interest rate rise on Thursday, September 14 but there are expectations that the event will see the Bank turn more 'hawkish' than it has been at recent meetings.

By 'hawkish' we would expect hints of discomfort with inflation and warnings that rate rises were coming as a result.

However, it would be the vote split for an interest rate rise that would provide the initial and most substantial hint.

The Bank of England’s Andy Haldane is a wild-card among the nine-person Monetary Policy Committee who could light a fire under the Pound Sterling on Thursday.

Haldane, the Bank’s chief economist and a moderate voter on the MPC, indicated in June that he could vote for a hike later this year but chose to stand pat at the August meeting.

The move surprised some who believed he would join those pushing for a reversal of 2016’s 0.25% interest rate rise. The assumption was one reason why Sterling rallied mid-year and subsequently fell when markets realised the Bank was in fact not as close to raising interest rates as previously believed.

Haldane therefore matters for Sterling, and with expectations for his vote to remain with the status quo at the September meeting, should he vote for a cut markets will be greeted with a surprise.

“We are still none the wiser over why BoE Chief Economist Haldane did not vote for a rate hike in August after teeing it up in advance. It adds uncertainty to the vote count at this week’s meeting,” says Derek Halpenny, European head of global markets research at MUFG.

“Our key risk scenario is for this meeting is for a third dissenter to emerge in favour of a hike. Were this to occur, we think Sterling could see a significant repricing across the spectrum of G10 currencies,” says James Rossiter, a strategist at TD Securities.

With the Bank's Monetary Policy Committee returning to full strength with nine members, in September, even a hawkish turn by Haldane is unlikely to yield a change of policy this month but the message will be clear - providing an instant boost to Sterling.

The Bank of England will announce the latest interest rate decision of the MPC Thursday at 12:00 pm London time. Markets will watch the vote count closely and scrutinise the policy statement intensely for indications of a turn in sentiment among rate-setters.

“With the ECB taking only careful steps toward its next taper and markets inclined to doubt the Fed’s willingness to deliver a December hike, policy divergence would quickly—and somewhat ironically - turn in favour of the GBP,” adds Rossiter.

“The risk of Chief Economist Haldane voting for a hike could help the EUR/GBP correction extend below support at 0.9090/9100 – potentially as far as the 0.9000/9025 area,” says Chris Turner, head of foreign exchange strategy at ING. EUR/GBP at 0.9090/9100 gives us GBP/EUR at around 1.10 and 0.90 gives us 1.11.

Granted, these levels in the exchange rate have been taken out by the recent bout of Sterling strength, but we would imagine the move would extend even further were Haldane to vote for a rise.

Analyst Kamal Sharma at Bank of America Merrill Lynch says Pound Sterling could rally further on the Bank of England's Thursday meeting.

"A less dovish MPC is likely to provide some support for GBP,” says Sharma. BAML do however reiterate their call for a weaker GBP heading into a series of political events that they think will test the market's belief that a transition agreement will be announced sooner rather than later.

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The Bank of England has held the base rate at its record-low of 0.25% since August 2016.

Governor Carney has warned previously that the Bank could soon raise rates to maintain its inflation target at 2.0% is maintained. Concerns that the rate will breach 3.0% on the back of renewed Sterling weakness - particularly against the Euro - have been heightened.

Raising rates could underpin the Pound, thereby capping the rise in inflation.

Michael Saunders, another MPC rate setter and a frequent hawk, has been calling for a rate hike since March.

He reiterated his view, at a speech in August, that a rate hike would simply remove the additional stimulus put in place by the BoE in the wake of the Brexit vote of 2016 and that this would be justified given the economy's performance since the vote.

“A similar case was made in June by Haldane, who despite having voted consistently for stable rates so far, had indicated that, for this very reason, he could vote for a hike towards the end of this year,” says Asmalah Jamaleh, an economist at Intesa Sanpaolo. “Which could mean November, when the Inflation Report containing updated growth and inflation forecasts will be released.”

Watch Carney

As mentioned, most commentators and economists doubt that a rate rise is on the cards for later this week, but most agree there is a chance that the vote split could signal a hawkish shift at the Bank.

Haldane is the obvious one to watch but Kathleen Brooks at City Index suggests it is also interesting to see how Governor Mark Carney votes.

Although he has been concerned about growth, in a speech in June he mentioned the fact that the Bank could not ignore rising prices indefinitely.

"Is now the time for the Governor to put his money where his mouth is and actually vote for a rate hike? If yes, then sterling is likely to fly high," says Brooks.

While we may be too soon in our call for a vote for a rate hike from the Governor of the BOE, "if inflation continues in this direction then it won’t be too far away," adds the analyst.

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