Coming up from the UK today - the BoE meeting, minutes, inflation report and a letter from Governor Carney

Earlier previews are here:

More now, via ...

Nomura:

  • With only three months having passed since the BoE's decision to raise rates for the first time since the financial crisis, we do not expect any changes in policy from the MPC at this month's meeting.
  • However, at some point in the near future we expect to see a language-change that will ultimately signal a policy move at the May meeting.
  • A significant shift in signalling - like we saw in September last year - seems unlikely at this week's meeting, but the Governor may leave all options on the table, so as not to rule out a move as soon as May.
  • It will be interesting to see how the combination of rising oil prices and sterling's rally affects the BoE's end horizon forecasts for inflation (which currently stand at 2.39% and 2.15% based on constant and market interest rates).

Société Générale:

The February Inflation Report meeting will present the first opportunity for the MPC to update its forecasts after making its first rate increase since 2007 in November. Each February the committee performs a stock-take of the supply side of the economy.

  • We don't expect any change in the estimate of growth in potential supply of "around 1 1⁄2%".
  • The new forecasts should reiterate the view that inflation peaked in 4Q last year but the Bank will also reiterate the need for some more gradual and limited tightening of policy in due course.
  • We expect a unanimous vote for unchanged policy.

In addition to the impact of the November Budget, which is expected to add 0.3% to GDP over the forecast period, the new forecasts will also incorporate the 4Q GDP outturn of 0.5% qoq compared to the November Inflation Report forecast of 0.4%, adding to the upward forecast revision that will be made.

  • But, guess what, in truth the change to the underlying forecast path is likely to be insignificant. How can we be so sure? Almost without exception in recent years, regardless of the specific factors the MPC cites as affecting the growth path in each quarterly update, the qoq growth sticks doggedly at 0.4% qoq beyond the first one or two quarters of the forecast. This is unlikely to change. Whilst the subtle changes to the GDP forecasts will have some effect, that is likely to be swamped by the major increase in the oil futures curve since November. In November, the Brent front month was trading around $62 per barrel. In the fortnight before the current meeting, it was trading around $69. So the inflation forecast will be raised but that will be tempered by the rise in the pound against the dollar that has also occurred in recent weeks so the net effect is unlikely to be very great.
  • Moreover, any changes that are made will not alter the central feature of the inflation forecast. Namely that the Bank clearly forecasts that inflation will have peaked in 4Q 2017 and will thereafter decline sharply).

Why then does the MPC persist in wanting to tighten policy?

  • At the forecast horizon, inflation sits slightly above (15bp) the 2% target but that is not a very convincing justification. In February 2017, when the MPC was clearly not ready to raise rates, inflation was 36bp above 2% at the three-year horizon. It probably comes down to a general feeling of unease that the quiescence of wage growth cannot be taken for granted for much longer.

Since the arrival of Mark Carney, the MPC has undertaken an annual reappraisal of the supply side of the economy. This fact was not immediately apparent but has since been made explicit. The November Report said that "The MPC judges that UK potential supply growth is likely to remain modest over the forecast period at around 1 1⁄2%." The net impact of the fresh information on the rate of supply? Probably little change so we expect the MPC to repeat the above estimate of around 11⁄2%. Also we do not expect the committee to change its 41⁄2% estimate of NAIRU. We expect the vote to be a repeat of the December meeting with a unanimous vote for unchanged policy.