The Bank of England (BoE) has just released its latest monetary policy decision. No change. No surprise there then, very dull. Or was it? The minutes from the Monetary Policy Committee are now released at the same as the main policy statement. The minutes add meat to the bare bones of the headline policy which has once again kept interest rates flat at 0.5% and asset purchases at £375bn (and anyone who has followed the BoE policy statements over recent years will understand it when I say that). But what have the latest set of minutes told us about the timing of a future rate hike by the BoE? The initial reaction to the Bank of England’s meeting minutes has been supportive for sterling.
Well, in recent speeches, Mark Carney has been fairly calm about the impact of China, noting in comments at the end of August that China’s “Black Monday” would not affect the BoE’s plans to hike interest rates. UK economic data has not been great recently. The trade deficit in July was the largest for 12 months at -£11.1bn driven by a 9% fall in exports. This could have a sizable impact on growth in Q3 with the first month looking to be a drag on GDP. Add in the fact that August’s PMI data across services, construction and manufacturing all missed estimates and all showed a decline, the outlook for the UK economy has taken a bit of a hit in recent weeks. If you think this would have given the Bank of England an excuse to retain a dovish lean in the minutes, you might be mistaken.
The minutes of today’s meeting showed that the voting make up was maintained at 8:1 with the one dissenting voice being again Ian McCafferty (it would have been an extremely dovish signal is McCafferty had retrenched once more). Here are a few highlights of the minutes (with my comments):
- It is premature to expect the impact from overseas risks on the UK and the MPC will monitor closely (again a fairly neutral “wait and see” comment)
- The downside risks to world activity have probably increased but not enough to affect the August forecasts (a neutral comment)
- BoE staff cut the forecast Q3 growth of GDP to 0.6% from 0.7% (not overly surprising given the recent deterioration in the trade deficit – but is also not too bad so fairly neutral if a touch dovish)
- There were a range of views on inflation with some members seeing a risk of overshooting the 2% target (this is the HAWKISH piece here as only 1 voted for a hike, suggesting that there is at least one if not more ready to move)
- CPI is likely to stay near zero for a few more months with volatile oil increasing the uncertainty (this still lays the groundwork for a hike in early 2016)
- The higher productivity is offsetting higher wages (strong for the economy and by inference is reasonably hawkish)
Generally speaking this is a neutral set of minutes, with an interesting slight hawkish twist. Hence why Cable has rallied a touch.
Markets have been fairly stable with the yield on the 2 year Gilt has come off the top in recent days. This is not suggesting the bond market is factoring in an imminent rate hike (again no surprise). In the wake of the minutes the 2 year yield has been steady. The general trend has been higher over the past few months suggesting the market is getting ready for a hike. This outlook would be sharpened though on a sustained move towards 0.75%.
The rebound on Cable in the past week has maintained the range that has been in place for the past few months. This has come as uncertainty has surrounded the expectations over potential rate hikes for both the Bank of England and also the Federal Reserve. The fact that the support of this range has held, suggests to me that the market has not shifted its views on when the respective banks may look to hike rates. The choppy market will continue for now. Today’s push higher on Cable is bullish near term and could last into the weekend. Technically, Cable is strong for a near term rebound and breaking above $1.5420 is a bullish move that opens $1.5500/$1.5590. A close today above $1.5405 would be a bullish outside day and a strong continuation pattern. However it is likely to begin to run out of steam next week as the market looks towards the FOMC meeting next Wednesday/Thursday.
Ultimately, if we see a sustained move on Cable below the support band $1.5090/$1.5170 then this would be a signal for a change in market expectations on the interest rate differentials on the respective rate hikes. For now though, it is as you were.