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After the European Central Bank began its long-awaited tapering programme and having bid farewell to the Federal Reserve’s Janet Yellen, it’s finally time for the Bank of England to take the spotlight with its quarterly ‘Super Thursday’.
The Bank will publish its latest inflation report alongside the monetary policy decision from the nine-strong Monetary Policy Committee (MPC) at midday (12pm), before Governor Mark Carney follows with his customary press conference and Q&A session (from 12:30pm onwards).
Expectations are that the MPC will keep interest rates on hold at 0.5%, however the split of the vote and the tone of Carney’s press conference will be most telling. The probability of a rate hike occurring tomorrow stands at just 3.4%, and therefore a hike could risk spooking investors, resulting in sharp movements in the Pound and UK 100 .
While most economists see policymakers voting 9-0 in favour of keeping rates unchanged, any deviation from this – such as an 8-1, 7-2 or 6-3 vote, with some more hawkish members voting for a 0.25% rate hike – this could lead to increased expectations of a rate hike happening at the Bank’s next Super Thursday in May.
Furthermore, any mention in the statement reflecting that rates will rise sooner rather than later, language used in the run up to last year’s first rate hike since the financial crisis, would be seen as a hawkish move by policymakers.
One way this could come about would be if the BoE’s inflation report forecasts a further uptick in inflation from the current 3% level (where it has hovered for the past six months), already 1% above its target, and therefore see the need to raise rates in order to protect the UK consumer from a sharp rise in the price of goods.
Currently, the probability of a rate hike on 10 May stands at 48.7%. However should any of the two scenarios above take place, these expectations could be drastically repriced to better reflect a fresh dose of hawkishness in the central bank.
This in turn could see an uptick in the Pound to the detriment of the UK’s UK 100 and 250 foreign-exposed stocks. Conversely, should no significant signal be made that the Bank is willing to raise rates as soon as May, this could dent Sterling and see the UK’s blue chip index move higher.
As always, guidance will be key.
Henry Croft, Research Analyst, 7 February
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