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 Wednesday 13 January 2016

PM Bulletin: The Bank’s rate decision

 

 

The Bank of England’s Monetary Policy Committee (MPC) will announce their latest rate decision tomorrow.  To date, I haven’t come across anyone who thinks they will follow their central banking colleagues at the US Federal Reserve and hike rates. All the speculation is that the MPC will keep their headline Bank Rate at the 0.5% level where it has languished since March 2009. In fact, far from taking a tightening bias, there is some chatter that there could be a slight change in the MPC vote with Ian McCafferty possibly dropping his call for a 25 basis point hike. Mr McCafferty has been calling for a rise since August last year, citing the “balance of risks around inflation by 2017.” This meant that the vote since then has been 1-0-8, meaning one member calling for a hike, none for a cut and eight to maintain the status quo.

Going back to this time last year the vote had been a dovish 0-0-9. However, that result in itself came as a shock to market participants as it meant that two committee members had dropped their call for a (modest) tightening in monetary policy.

If Mr McCafferty does change his vote it will be for the most understandable of reasons. Oil and other key commodities are trading at multi-year lows. This wasn’t what the world’s central bankers predicted this time last year when oil was expected to be rallying again. Instead, the effects of the ongoing commodity sell-off are again adding to fears of deflation, as is the prospect of a further devaluation of the Chinese yuan. Deflation may be good for us consumers as food and petrol prices fall. But it’s no good for highly indebted governments and corporations, and that’s why it concerns our central bankers.

Any sign of increased Bank dovishness is significant in the current financial environment. It will mean that expectations for the first rate hike get pushed out well beyond this year for a start. Furthermore, it shifts the Bank closer to the ECB, Bank of Japan and People’s Bank of China in policy terms and away from the Fed. This should continue to weigh on sterling.

The MPC’s Bank Rate vote will make for a good headline and should lead to instant market reaction. But we’ll also need to parse the accompanying Monetary Policy Summary to glean greater insight into the committee’s thinking. 

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Spread Co is an execution only service provider. The material on this page is for general information purposes only, and does not take into account your personal circumstances or objectives. Nothing in this material is (or should be considered to be) financial, investment or other advice on which reliance should be placed. No opinion given in the material constitutes a recommendation by Spread Co Ltd or the author that any particular investment, security, transaction or investment strategy is suitable for any specific person.

 

Posted by David Morrison

Tagged: Bulletin PM

Category: PM Bulletin


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