ITC – BoE June Meeting Preview: Almost Nothing To See, Move Along

Thursday, June 20: 12:00 BST BoE Policy Decision and Minutes

Current Policy: Bank Rate: 0.75%; Asset Purchase Programme: £435bn; Corp Bond Purchases: up to £10bn

In Brief:

-Analysts surveyed by BBG unanimously expect no change in policy rates

-No change expected on QE programmes

-MPC likely to vote 9-0 for keeping all policy unchanged

-Some recent hawkish comments from BoE but Brexit and global uncertainties likely leave BoE on hold

-Some desks expect widening divergence between MPC member views and focusses: good unemploment & wages vs focus on Brexit and global slowdown risks

-Markets pricing a 20% chance of a 25bp cut by end of 2019

-No Updated Quarterly Inflation Report (QIR) at this meeting

The MPC will meet this week against the backdrop of deteriorating economic data, tight labour markets and Brexit-related uncertainty. Analysts unanimously expect no change in the current bank rate, with everyone calling for a 9-0 vote. All QE parameters (Asset Purchase Programme or the Corporate Bond Purchase Programme) are also expected to remain the same.  Market expectations for the tone of this meeting have evolved over time.  Just a few weeks ago everyone expected the MPC meeting would be a complete non-event but some hawkish comments by Broadbent, Haldane and Saunders triggered some to see potential for a hawkish surprise. However, prevailing uncertainties should limit any hawkish tilt significantly, including: 1) Boris Johnson, a hard Brexiteer as potential new leader of the Conservative party and PM; 2) continued trade tensions between US and China which has hit PMIs in UK and Germany; 3) dropping CPI in the EU (Germany, France and Italy) will likely result in limiting.  Indeed, since the May BoE the market has switched to pricing in the next move as being more likely to be a cut than a hike.

With the potential for a no-deal Brexit having increased significantly over the last few weeks, the MPC is likely to simply stay on hold for the time being. In the May Minutes, the BoE had iterated that ‘the economic outlook will continue to depend significantly on the nature and timing of EU withdrawal and the new trading arrangements between the European Union and the United Kingdom’. The monetary policy response to Brexit, whatever form it takes, will not be automatic and could be in either direction.

This is a non-QIR meeting so no new forecasts will be published.

What’s Priced In:

What a difference 6 weeks make to financial Market pricing. As can be seen from the table below, on May 2nd after the last BoE meeting, the market was pricing around a 43% probability of a 25bp rate by January of 2020. For the same date, the market is now pricing a 27% chance of a 25bp cut. Most of this change has been driven by two separate components: a significant rally in US fixed income on the back of the perceived slowdown of the economy (China trade deal) and an increase probability of a no-deal Brexit (which many believe will result in BoE cutting rates)

Street Views:

-Barx: Expect unch policy and minutes to show current rhetoric of gradual hikes. Expect divergence of views within the committee as some concentrate on low unemployment while others focus on global slowdown risks.

-BAML: Domestic and global backdrop has deteriorated since the May MPC and hikes are becoming harder to justify. Developments on the political front means a hard Brexit is becoming more likely and expectations are that the BoE would cut in this scenario.

-Danske Bank: BoE meeting is probably not important and the MPC is firmly on hold for now.

-Citi: Although the MPC is sounding hawkish, the presence of a Brexit cliff-edge in October leaves the MPC firmly on hold. June meeting is therefore going to be a non-event.

-JP Morgan: MPC should have been a non-event although the hawkish comments by Haldane and Saunders makes the meeting a bit more interesting. Nevertheless, expectations are for unchanged policy and no dissent although the BoE may attempt to be slightly hawkish to push back against market pricing.

-GS: No changes expected in June plus believe the MPC is unlikely to either ease or tighten policy as long as the Brexit issue is not resolved. Over the medium term, assuming Brexit is completed and doesn’t significantly impact the economy, they would expect a one quarter point rise per year.

-MS: No changes expected in June but expect the MPC to maintain hawkish bias due to strong pay growth; expect policy on hold due to Brexit uncertainty and potential for downside risks to global growth. Longer term expect a mid 2020 hike once Brexit is resolved although a no-deal would lead them to cut instead

-NWM: Expect unanimous vote for no change in policy despite recent hawkish rhetoric. Expects minutes to show widening divergence between those signaling near-term policy tightening and those concentrating on deteriorating data.  See a 25bp rate cut by mid-2020.

Recent Data:

The UK is still enjoying record low unemployment rates of 3.8% (below the BoE estimate of full employment at 4.25%). a long run of well above 3% YoY average earnings and HCPI running at a respectable 2.1% YoY in April.  Service sector PMIs have also avoided the recessionary readings now dogging the UK’s manufacturing and construction sectors.  However, a No deal Brexit risks bursting this bubble and delays to a Brexit deal have already led to clear softness in Q2 data. Recent data have suggested that a downturn is starting as IP fell 1% YoY in April and May manufacturing PMIs (Markit and CBI) both fell to three year lows (below the boom-bust 50 level).  UK construction PMIs also contracted, but retail/services activity continued to grow modestly.

May Decision Statement and Minutes:

The MPC’s May decision statement and Minutes left all policy unchanged with a unanimous vote and showed that MPC continues to believe that slightly higher rates would be needed in the UK if economic conditions developed as expected. Nevertheless, the large unknown created by Brexit means they are simply in a wait and see mode until Brexit is completed.

“The Committee continues to judge that, were the economy to develop broadly in line with its Inflation Report projections, an ongoing tightening of monetary policy over the forecast period, at a gradual pace and to a limited extent, would be appropriate to return inflation sustainably to the 2% target at a conventional horizon. The MPC judges at this meeting that the current stance of monetary policy is appropriate.

The economic outlook will continue to depend significantly on the nature and timing of EU withdrawal, in particular: the new trading arrangements between the European Union and the United Kingdom; whether the transition to them is abrupt or smooth; and how households, businesses and financial markets respond.  The appropriate path of monetary policy will depend on the balance of these effects on demand, supply and the exchange rate. The monetary policy response to Brexit, whatever form it takes, will not be automatic and could be in either direction. The Committee will always act to achieve the 2% inflation target.”

May QIR showed inflation in 2yrs at 2.05% and in 3yrs at 2.16%. With market rates having dropped since the May meeting, projected future inflation would normally be revised higher in the August QIR unless the view on the economy has deteriorated enough in the interim to justify the lower rates.

Recent BoE Speakers

June 11th: Vlieghe (Neutral): News since May has been disappointing in data and downside risks have intensified.

June 11th: Saunders (Hawk): will probably need to return to neutral policy stance sooner than markets expects

June 11th: Broadbent (Neutral): if the economy grows as per BoE f/c, interest rates will probably need to rise a bit faster than market curve priced in in May; not confident about indicating what direction rates would go in the event of a no deal Brexit

June 10th: Haldane (Hawkish): the time is nearing when a small rise in rates would be prudent.

May 30th: Ramsden (Dove): a little more pessimistic on GDP growth than latest BoE forecasts