A preview of the Bank of England's simultaneously publishing its interest-rate decision, the minutes of its policy meeting, and the Quarterly Inflation Report forecasts (QIR) on Thursday
Rate hikes are coming, but not likely till next year:
1- "It will likely highlight that the economy looks stronger than it did three months ago. Growth bounced back to 0.7% QoQ in 2Q, slightly better than the central bank had projected. Productivity looks perkier. Faster supply growth could, in principle, mean weaker inflationary pressures. But probably not in this case as wage growth has picked up smartly too. The expansion seems to be gradually shifting onto a more sustainable footing," BofA projects.
2- "There are probably fewer reasons to think inflation will undershoot the 2% target in the medium term. Indeed, "some" members said in the July minutes that the risk of inflation rising above the target in the medium term had risen. In other words, we do not expect the BoE to push back on the recent upward move in interest rates," BofA adds.
3- "Our call is for the first 25bp BoE hike in February next year, followed by hikes of the same magnitude in August and November," BofA projects.
FX: New paradigm may bring higher vol.
4- "In FX, the impact of Super Thursday has already been felt as the GBP options market has priced in a premium for 6 August particularly in EUR/GBP. As we move into a new paradigm for Bank of England policy communication, a certain amount of adjustment is likely for the FX market as it becomes accustomed to this new format and "what to look out for"," BofA argues.
5- "Given the vast amount of information that will become available at the same time, the initial GBP reaction therefore may not necessarily be the right one in the first few instances and in some regards "Super Thursday" could turn into the UK version of US non-farm payrolls day as one of the most significant trading days for the pound. As such, we would expect GBP volatility to be elevated each quarter when the Minutes and decision are accompanied by the release of the Quarterly Inflation Report," BofA projects.
6- "What will matter for FX markets from the variety of BoE releases is the voting pattern and the extent to which some members' decisions were "finely balanced" from the Minutes and the medium-term inflation projections based on current and market-based rates from the Quarterly Inflation Report. We would isolate these themes as focal points for the currency," BofA argues.
7- "Given the recent rhetoric from the BoE, and David Miles in particular, there is likely to be some market expectation that he has voted for a rate hike to make it a 6-3 decision. Any disappointment on a 7-2 should, however, prove short-lived as Miles is due to leave at the end of the month thus diluting the impact of his decision in any case. More important will be the first public utterances of the newly appointed MPC member Gertjan Vlieghe who will take up his position on 1 September. However, with the decision to hike rates coming into "sharper relief" at the turn of the year, we remain GBP bulls and expect the pound to rally into the start of a rate hike cycle as it has historically done," BofA adds.
