- BoE meeting concludes on Thursday, the day after the Fed
- Economists assign an almost zero chance of a rate cut
- Wednesday’s CPI and the Fed rate cut could lead to a surprise BoE move
- Pound to benefit from an uneventful meeting
BoE will announce its rate decision on Thursday
The Bank of England is joining the chorus of the central bank meetings on Thursday. While the market will be digesting the first Fed rate cut since March 2020, Governor Bailey et al will announce their rate decision, after a meeting that does not feature the publication of quarterly projections and a press conference.
UK data flow is not conducive to another rate cut…
Since the August 1 BoE rate cut, the data flow has been rather positive and has resulted in a significant decrease in the September rate cut expectations. Specifically, PMI surveys continue to point to underlying strength in the economy while the industrial sector continues to recover. Similarly, the labour market remains relatively tight as observed by the satisfactory growth in average earnings. Consumer spending remains under the weather even though housing prices have comfortably returned to experiencing positive yearly changes.
… but August CPI and a more aggressive Fed rate cut could prove decisive
Therefore, economists are overwhelmingly expecting an uneventful gathering. That could potentially change though if:
(1) the Fed actually opts for a more aggressive start to its monetary policy easing cycle than originally anticipated. The market is currently pricing in 63% probability of a 50bps Fed rate cut on Wednesday following last week’s weaker producer and import prices indices, and a WSJ report that a 50bps move is being considered. And,
(2) Wednesday’s August CPI report shows aggressively weakening inflation pressures. The market is looking for an unchanged 2.2% annual growth in headline CPI figure, but the core indicator, which excluded energy and food prices, could accelerate to 3.5%. A significant downside surprise, partly on the back of lower oil prices in August, could put pressure on the BoE to act sooner rather than later. The market is acknowledging that there is a reasonable chance of a rate cut surprise since it is currently pricing a 37% probability for a 25bps move.
Uneventful meeting expected but voting pattern matters
Barring a major surprise, expectations for an unexciting meeting will most likely be confirmed as the BoE’s chief economist is expected to propose rates to be kept stable. The focus will then turn to the November meeting that includes the critical quarterly projections and the usual press conference.
A total of 50bps rate cut is currently priced in with the BoE seen announcing 25bps cuts in both November and December, thus adopting a slower pace compared to the Fed’s 120bps of easing currently anticipated.
The market will also be interested in Thursday’s voting pattern. The August decision was reached by the slimmest possible majority, and it would be important to see if the two members, Dhingra and Ramsden, that voted for a rate cut in June, continue to push for further easing.
Pound could benefit from a balanced meeting
Despite the overall negative newsflow for the eurozone and the evident divergence in the economic outlook, the pound has been failing to materially benefit against the euro. Going into the BoE meeting, market sentiment will be clearly affected by the Wednesday Fed meeting.
Assuming nothing groundbreaking comes from the other side of the pond, a unanimous BoE decision to keep rate unchanged and an overall balanced tone at the press statement could help euro/pound finally break below the 0.8401 and make a move towards the 0.8339 level.
On the flip side, a 50bps rate cut by the Fed could force the BoE to turn more dovish than widely expected, potentially leading to a small number of doves voting in favour of a BoE rate cut. In this case, euro/pound bulls will probably have the chance to target the 0.8487 level and recoup part of their summer losses.
