The pound has been on an uptrend for much of 2017, led by a weaker dollar in the first half and by expectations of a UK rate rise in the second half. Its high of the year and post Brexit peak of $1.3656 was reached soon after the Bank of England’s September policy meeting when MPC members signalled "some withdrawal of monetary stimulus is likely to be appropriate over the coming months".
However, recent communication by some policymakers has been not as hawkish, if not dovish, casting doubt about the Bank’s intentions. The BoE’s newest deputy governor, Dave Ramsden, recently said he was not part of the majority who in September saw a case for tightening policy soon. Another deputy governor, Jon Cunliffe, said the timing of a rate hike was an "open question". Meanwhile, Governor Mark Carney hasn’t disappointed in living up to his reputation of flip flopping on policy, changing his tone from a hawkish one to a more cautious one at a recent hearing before Parliament’s Treasury Select Committee.
The mixed signals from the British central bank have led investors to pare back their expectations of UK interest rate increases, pushing sterling to the $1.30-1.33 region from a brief spell above $1.36. Although most analysts are still predicting the BoE will raise rates for the first time in a decade by 0.25% to 0.50% on November 2, expectations for subsequent rate hikes have fallen to just one quarter percentage point increase in 2018.
A possible split vote on Thursday could diminish the odds of any follow-up move. Consensus forecasts are for a 6-3 vote in favour for a hike. A 5-4 vote would be viewed as very dovish and could send the pound lower to retest the $1.30 level, while a 7-2 vote could trigger a fresh rally, driving sterling back above $1.34.
In addition to the rate decision, the Bank’s quarterly inflation report should also shed some light on future policy. Carney has said he expects inflation to rise further in the coming months above September’s 3.0% level. A sharp upward revision to the inflation outlook would fuel expectations of more policy tightening in the coming months. The growth forecasts will also be watched closely following the surprise beat of third quarter GDP growth. The GDP figures may have helped ease the concerns of some MPC members that the UK economy is not strong enough to support higher rates.
However, even with more optimistic projections of growth and inflation, the ongoing Brexit uncertainty and the slowdown in consumer spending would likely prevent the Bank from moving too fast on rates, with the eventual outcome of Brexit playing a larger role on the pound’s longer-term prospects than BoE policy.
