On Thursday February 8th, at 12:00pm GMT (U.K. time) the central bank of the U.K. the Bank of England, will reveal their decision regarding interest rates. Currently the base rate is at 0.5%, and there is little expectation for a rise. The BoE also discuss and then reveal their decision regarding the U.K.’s current asset purchase (Q.E) scheme, currently at £435b, analysts polled by Reuters and Bloomberg, expect this level to remain unchanged.
Once the interest rate decision is revealed, attention will quickly turn to the narrative accompanying the Bank’s decision. Investors and analysts will be looking for forward guidance clues from the governor of the BoE, regarding their future monetary policy. The level of U.K. inflation is currently 3%, which is one percent above the target/sweet spot that the BoE aims for as part of its monetary policy. In other eras the BoE may have raised rates to cool inflation. However, GDP growth in the U.K. is at 1.5%, therefore raising rates may damage such negligible growth. Moreover, raising rates now might impact asset prices, as an example, during the recent stress tests the central bank conducted, they concluded that a base rate rise to 3% could reduce the value of the London and South East England property market by up to 30%.
The MPC/BoE will also have to keep focused on the monetary policy of both the Fed and ECB, the two central banks of the U.K.’s main trading partners- the USA and Eurozone. The FOMC/Fed doubled rates in 2017 to 1.5%, the projection is for three more rises in 2018, to take rates to 2.75%. The ECB may have to raise, in order to maintain/manage the value of the euro, versus the U.S. dollar. Naturally these decisions could be postponed, if the current equity market selloff proves to be a correction of 10% or more, from the recent peak.
The BoE is also caught between a rock and a hard place, due to the Brexit situation. Mark Carney, the governor of the central bank and his colleagues on the MPC (monetary policy committee), found themselves in an extremely difficult position. Not only do they have to manage monetary policy whilst coping with the usual complications an economy will present, they also have to be mindful of the gradual and eventual full impact that Brexit will have on the U.K. economy, once Britain leaves in March 2019. What’s being termed a “transitional period” of trading, from March 2019, is now only a year away, the responsibility of managing the exit is now partly the responsibility of the BoE, not just the Tory government.
Traders should not only prepare themselves for the interest rate decision, but also for the press conference and any other narrative delivered by the BoE. If the decision is a hold at 0.5%, it doesn’t necessarily translate that sterling will remain unmoved versus its peers. Sterling came under pressure during the early part of the week due to the global equity market selloff, therefore the currency could be sensitive to any coded statement the bank, or Mark Carney makes.
RELEVANT U.K. STATISTICS RELATING TO THE HIGH IMPACT RELEASE
• Interest rate 0.5%.
• GDP YoY 1.5%.
• Inflation (CPI) 3%.
• Jobless rate 4.3%.
• Wage growth 2.5%.
• Govt debt v GDP 89.3%.
• Composite PMI 54.9.
