No change in the bank rate is expected, but it's all about the language
Or should I say, it's all about whether or not the central bank offers any hints of an August rate hike. The two things to watch out for today will be the votes and the guidance/language by the central bank.
For the votes, the expectation is for a 7-2-0 decision to keep rates steady with McCafferty and Saunders expected to dissent once again and call for an immediate hike. So, what's there to watch out for here? In the event of a 6-3-0 decision, it could spur a small bid in sterling as it would mean that more members are feeling confident about the BOE raising rates in the coming months as well. But if it is indeed a 7-2-0 decision, then expect little change to the rhetoric for an August rate hike.
What about the language/guidance then?
This is where things get tricky as the central bank has to juggle between talking up economic growth prospects, inflation, wages, while at the same time downplaying Brexit risks and the issue of household debt/consumption. Depending on which line they choose to take, it is really up to the market to interpret. But given historical statements, I expect the language to risks to remain similar and the big question will be how they set up expectations on the economy rebounding in Q2 and H2 2018.
I reckon the BOE will highlight that conditions and activity have improved, but any changes to policy moving forward will still be subject to data. In essence, it's going to be a message that the central bank is still data-dependent ahead of the August meeting.
Right now, the market is pricing in around a ~40% chance of a rate hike in August with November looking more likely at around ~75%. Should the BOE fail to reaffirm expectations for an August hike, I don't expect much to change as it just means the can gets kicked down the road until we get the next set of key economic data points.
Between now and then, there is time for Carney and co to still talk up a rate hike should data go their way and if not, they'd probably just let things be and wait to see if things change in the build up to November's meeting.
Either way, I'm not looking for the BOE to send any massive hawkish signals as they would otherwise risk facing the same situation in April again. And a central bank that cries wolf more often than not eventually loses all credibility with the market, and that is not something that Carney wants.
