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The current consensus is that the MPC will vote narrowly in favour of raising the headline Bank Rate by 25 basis points.

The Bank of England (BoE) holds an important monetary policy meeting on Thursday. Whereas the US Federal Reserve’s key quarterly meetings come in December, March, June and September, the BoE’s cycle runs November, February, May and August. These are meetings when the Bank’s Monetary Policy Committee (MPC) also releases its quarterly Inflation Report. Consequently, these meetings are just the right forum for announcing significant changes to monetary policy.

The current consensus is that the MPC will vote in favour of raising the headline Bank Rate by 25 basis points. If so, this would be the first time the Bank has raised rates since July 2007 and will also reverse the cut made in August 2016 in the aftermath of the UK referendum. This was when a majority of the electorate voted to leave the European Union. The odds suggest that the nine-member MPC will split 6-3 (or maybe even 7-2) in favour of a rate hike with Jon Cunliffe and Dave Ramsden (two out of the three deputy governors) most likely to vote against.

Some analysts point out that the post-referendum rate cut (along with the addition to the asset purchase facility) was quite unnecessary. They point out that the Bank’s forecasts of an immediate collapse in economic growth, business confidence and soaring unemployment following a Brexit vote were all well wide of the mark and were little more than establishment scaremongering. Since then inflation has been on the rise, thanks to a great extent to the post-referendum sell-off in sterling. Headline CPI for September came in at 3.0% - a full percentage point over the Bank’s 2% inflation target and its highest level in over five years. Meanwhile, the UK’s unemployment rate stands at 4.3% - the lowest since 1975. These factors lend weight to the view that the Bank should now begin to tighten monetary policy. This would also be consistent with moves from the US Federal Reserve, and indeed the ECB as the latter is set to reduce its monthly bond purchases from the beginning of next year.

However, there is also a strong argument in favour of keeping rates on hold. Although a touch better than expected, UK growth is running below par with third quarter GDP running at just +0.4%. At the same time the Bank may decide to keep rates unchanged given the uncertainty surrounding the ongoing Brexit negotiations.

Even so, the probability of a rate hike on Thursday is around 90%. Yet around 70% of economists polled by Thomson Reuters last week believe that this would be a mistake. Given this, investors will be paying very close attention to the accompanying Monetary Policy Summary and to Governor Mark Carney’s subsequent press conference. Any suggestion that a rate hike on Thursday is a one-off should send sterling lower, even if there is an initial knee-jerk rally. This could see the GBPUSD break below the upward-sloping trend line which comes in around 1.3000. In contrast, if Carney signals that further tightening is likely, we should expect to see the British pound rally with a retest of 1.3400 - the 50% retracement of the June-October 2016 sell-off a real possibility. 

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Posted by David Morrison

Tagged: forex GBPUSD Brexit BoE Spreadbetting

Category: PM Bulletin


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