The Bank of England has decided once more to stand pat on rates and QE. For the past six and a half years the Bank of England has held the base rate steady at 0.5% and significantly open for debate as to when it will change them again. Consensus suggests that the next move will be higher. In March, the bank’s Governor Mark Carney made it clear that the next move was going to be up, whilst in July he suggested that a rate hike was moving closer, whilst the decision to start the normalisation of monetary policy could come into “sharper relief around the turn of the year”.
So in the coming months, markets will be looking for clues that could hint towards the timing. (For what it’s worth, I still think it will be February 2016.) Current market prices do not give too much certainty either way. The yield on the 2 year Gilt has been trending higher through 2015, but is still not really at a level that would suggest the market is pricing in a rate hike. Although the market is moving in the right direction, a sustained move towards 0.70%/0.75% would be a sign of positioning.
Then there’s Cable, which has been range bound for several months now. In a broad band between $1.5100/$1.5900, the outlook for sterling/dollar seems to be fairly neutral. This would take into effect the market’s outlook for the interest rate differentials between the UK and US. The rangeplay throughout the summer months suggests that the market is fairly settled and that the respective central banks are pretty much in lockstep. Expectation is that the Fed will be the first mover, with the Bank of England following closely behind.
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Today’s Bank of England’s minutes of the meeting do little to change this view. A slight cut in the staff growth projections to 0.6% is not to be unexpected in the wake of the disappointing increase in the UK trade deficit, whilst the inflation rate is expected to remain around zero for the next few months. The gains in productivity are a mixed message really as they convey a strengthening economy but also should not put too much pressure on prices. Furthermore, the current global market conditions are not having too great an impact on the bank’s policy, so it is as you were then.
There was though a slightly hawkish hint, in that “some” members are concerned with an overshoot of the 2% inflation target. Considering that only one member (Ian McCafferty) voted for a rate hike, this would suggest that one or more other members were ready to vote for a hike. This has driven some gains on sterling as a result and should help to underpin Cable moving into the crucial monetary policy meeting of the Federal Reserve next week. However, it is no game changer, at least, not yet.
What is likely though is that the UK is not in a dissimilar economic position to the US. The Bank of England will therefore be sure to pay close attention to the Fed next week. In this game of when “will they, won’t they?” the ball is back in the FOMC’s court. It’s over to you Chair Yellen!