The Bank of England (BoE) is set to leave interest rates unchanged this week but will likely try to convince investors rate hikes are around the corner.
The BoE will on Thursday publish the minutes of the latest Monetary Policy Committee (MPC) meeting and the committee’s decision on interest rates. Analysts think the MPC will vote unanimously to kept the benchmark bank borrowing rate unchanged at 0.75%.
“We expect unchanged policy and for the minutes to maintain the current rhetoric of a gradual path of rate hikes,” Barclays’ senior UK economist Sree Kochugovindan said in a note sent to clients last Friday.
The Bank of England has repeatedly signalled that it wants to gradually raise the benchmark interest rate, which remains at a historic low. But economists, analysts, and investors think hikes are unlikely as long as Brexit remains unresolved and the UK’s economy remains lukewarm at best. Market prices indicate investors believe a rate cut is more likely than a hike.
As a result, Bank of England governor Mark Carney and his colleagues will have to signal in the MPC minutes and Thursday’s press conference that they do actually plan to hike rates if they don’t want markets to get a shock.
‘Risks have turned to the downside’
“We do not expect the BoE to move interest rates higher unless or until there is some positive resolution to the Brexit saga,” Nomura’s George Buckley wrote in a note to clients last week.
As well as Brexit uncertainty, Credit Suisse said economic “risks have turned to the downside” since the MPC’s last meeting. The investment bank cited recent worsening UK manufacturing data, as well as ongoing trade tensions between the US and China, both of which could hit economic growth. Barclays last week cut its forecast for UK GDP growth in 2019 from 1.2% to 1.1% on similar concerns.
Against this backdrop, the central bank looks more likely to cut rates than to raise them. Lower interest rates should help boost growth by encouraging borrowing and spending.
However, the Bank of England has consistently said it wants to gradually raise interest rates — not cut them further. Carney has even suggested he could raise rates if there is a no-deal Brexit, counter to conventional logic.
In order to keep this path open, the BoE will have to prepare the market for future hikes. It will likely do so by sounding a “hawkish” tone in the public comments of the committee. (In central banking, “doves” favour low interest rate policy, while “hawks” favour higher interest rates.)
“The MPC will have to issue fresh, dovish guidance in order to satisfy markets on Thursday, which now think the Committee is more likely to cut than raise Bank Rate within the next six months,” Samuel Tombs, chief UK economist at Pantheon Macroeconomics, said in a note to clients.
“But with clearer signs emerging that domestic price pressures are building, we expect the Committee to reiterate its commitment to ‘ongoing’ tightening and to repeat its May warning that markets' expectations are out of line with reality.“
‘The markets ain’t buying it’
Even if Carney and his colleagues do strike a more “hawkish” tone, investors may remain out of step with the bank.
“Markets are pricing out any prospect of a rate hike from the BoE this year (amid a Fed-led collapse in global rate expectations),” Michael Ingram, the chief market analyst at WH Ireland, told Yahoo Finance UK. “So they can try and sound hawkish, but the market ain’t buying it.”
The Bank of England’s decision will come a day after the US Federal Reserve makes its latest call on interest rates. Investors believe the Fed will signal rate cuts later this year. This loosening of policy may undermine the BoE’s attempts to threaten future rate rises.
Aside from the tone of comments from MPC members, investors will be watching the balance of voting on the nine-member committee closely. If even one member dissents, it could send shockwaves through the market as investors shift bets towards a rate hike later this year.
“A couple of hawkish comments from Haldane and Saunders have made that meeting a little more interesting than it might have been,” Allan Monks, JPMorgan’s UK economist, said in a note to clients.
“But we expect there will be no dissents at next week’s meeting, with the BoE instead using its communications to push back against current market expectations for cuts.”
Oscar Williams-Grut covers banking, fintech, and finance for Yahoo Finance UK. Follow him on Twitter at @OscarWGrut.