At midday tomorrow the Bank of England’s Monetary Policy Committee (MPC) will deliver its latest rate decision together with its vote breakdown, inflation outlook and Monetary Policy Summary. Following this, at 12:45 GMT, Governor Mark Carney and other senior MPC members will hold a press conference to discuss the inflation report.
There really isn’t any expectation that the MPC will raise or for that matter cut rates tomorrow. The Bank’s headline interest rate has been held at 0.5% since March 2009 and the MPC seems pretty relaxed about maintaining the status quo. Neither is the committee expected to do anything to the Asset Purchase Facility which has stood at £375 billion since July 2012. In other words it should be business as usual. But it wouldn’t truly be “business as usual” unless Mr Carney performed another little rhetorical tease during the inflation report. After all, he does have “previous.”
Back in the summer of 2014 Mark Carney was accused by a member of the Commons Treasury Select Committee of behaving like an “unreliable boyfriend.” It was a barb that hit home. After all, Mr Carney had, in the twelve months that he had held the position of governor, given a number of conflicting indications concerning the timing and direction of the next move in the UK base rate. This had seen sterling rally against the dollar from 1.4800 in July 2013 to just over 1.7200 a year later. It subsequently fell sharply so that by April this year it was within striking distance of 1.4500. In the months since then it has been relatively subdued in comparison, for the most part trading between 1.5200 and 1.5800.
Now Mr Carney cannot possibly be blamed for all, or perhaps even the major part of this movement. After all the GBPUSD currency pair is just that – a pair whereby two currencies fluctuate in relation to each other. But he has certainly made a contribution to its fluctuations and no doubt will continue to do so.
So the question is whether he will choose to be dovish or hawkish during the inflation report hearing. This could just be a function of which side of the bed he gets out of tomorrow morning. However, it’s worth considering the state of the UK’s economy.
There are certainly a number of data points which suggest that we could be due a rate rise. Just this week we saw strong Manufacturing, Construction and Services PMIs. On top of this the employment picture is looking extremely bright. The Unemployment Rate came in at 5.4% last month, its lowest level since the summer of 2008. Bear in mind that Mr Carney’s early unemployment target (or threshold as it was subsequently described) was 7% - a rate that was breached in the summer of 2014. On top of this the UK was the fastest growing economy in the G7 group in 2013/2014. Despite this growth isn’t exactly soaring. Last week third quarter GDP came in a just +0.5%, below the second quarter’s +0.7%. And perhaps most importantly, there’s scant evidence of inflationary pressures building anytime soon. CPI is currently running at -0.1% annually and there’s no sign of oil prices picking up significantly and adding to inflation as things currently stand.
Back in July this year Mr Carney said that when interest rates finally do rise, increases “would proceed slowly.” He also predicted that the decision when to start would come into sharper relief around the end of the year. Well that’s where we are now.
One thing to pay close attention to is the developed-world central bankers’ obsession with a 2% inflation target. The UK, along with the Euro zone, is a long way below that threshold. In addition, with the odds dramatically shortening on the Fed raising rates in December (while the ECB look set to increase monetary stimulus) Mr Carney’s MPC may prefer to wait. After all, this should lead to sterling weakening which will support the UK’s exporters and ultimately boost inflation closer to the 25 target. Hopefully the Bank will want to provide the market with a clear signal of an impending increase rather than risk the volatility of a surprise. We’ll know more tomorrow.