ITC BoE Preview: Data Dependence Delays Delivery?

In Brief:

-MPC likely to vote 7-2 to keep rates on hold (a few outside calls for 9-0 or 6-3)

-McCafferty and Saunders likely to dissent again

-weaker run of data and Carney (Apr 19) comments in focus

-GDP f/c likely lower this year; unch growth projections further out

-CPI f/c in 4Q likely lowered in all years 

Thursday 10th May 2018:

-MPC Rate Announcement, Minutes and QIR Release (12:00 bst)

-Inflation Report Press Conference (12:30 bst)

Way back in late March, a 25bp hike from the BoE at the May meeting looked like a foregone conclusion. However, a month is a long time in central banking and a soft run of data, alongside cautious words from Mark Carney have all but erased both market and analyst expectations of a rate hike on Thursday 10th. Several desks have pushed out their calls for a rate hike to the August 2nd meeting, implying that the BoE will be reluctant to signal a long period of policy inertia in this week’s inflation report, and also that the three-month period between May-August will be sufficient time to demonstrate that the weakness in Q1 economic data was in fact temporary. Consensus this week is for 7-2 on the rate vote with McCafferty and Saunders calling again for an immediate 25bp hike – while data has softened, there are still bright spots including low unemployment and wages which implies the argument for a hike is not completely dead.

#Focus: The “Unreliable” (?) Governor and Friends

“Thanks Mark… you did it again”. These were the words utter through the clenched teeth of many a sterling rates trader on the evening of April, 19th. Prior to Governor Carney’s BBC interview, MPC-dated OIS was pricing a robust 82% chance of a hike at the May meeting – a number which dwindled to 48% by the close of business on Friday 20th. In the interview, Carney said he was more concerned about the “general path” of rates rather than the precise timing of the next hike, but still said that Britain should prepare for “a few interest rate rises over the next few years”. “We have had some mixed data … we’ll sit down calmly and look at it all in the round”. More pertinently, Carney said that while he was sure there will be some differences of view he was “conscious that there are other meetings over the course of this year”. While very few desks think Carney was sending a premeditated policy signal, the subsequent weaker GDP and PMI releases certaintly indicate room for pause.

Michael Saunders (March dissenter) followed Carney the next morning, saying that, “We do not need to set policy in a way that will create rising spare capacity or higher unemployment. But our foot no longer needs to be so firmly on the accelerator”. While the “accelerator” comment may have pared back expectations further, he did say that “further tightening is likely to be a gradual place and to a limited extent” did not imply “glacial” movement.

#Focus: Data

Since Carney joined the BoE in 2013 he has (unfortunately) signaled a preference for rising rates on several occasions, only for economic data to not back him up. While the initial reaction to his April 19th comments felt very much like an ‘about-face’ from the Governor, the subsequent data would (this time at least) appear to validate his caution. Poor weather has weighed on the economic performance of much of Europe in March, although data in the UK has been amongst the weakest. The UK has seen softer March retail sales, weaker preliminary Q1 GDP (slowest annual rate in 5y), lower Services and Manufacturing PMI releases and inflation printing below the BoE’s February projections. Communicating their interpretation of the Q1 slowdown will be a central task for the MPC this week  – it is probably safe to say the MPC will avoid indicating that a May hike was a “now or never” moment – possibly choosing to echo Carney’s “other meetings… this year” line instead.

The so-called “Beast from the East” in late February/early March likely played a role in the data weakness, although a comment from the ONS in their GDP write up warrants revisiting – “While some impacts on GDP from the snow in the first quarter of 2018 have been recorded for construction and retail sales, the effects were generally small, with very little impact observed in other areas of the economy”. The ONS particularly noted a poor track record particularly for the construction sector, noting that construction “output fell across all three months of the quarter, not just during the period of bad weather”.

Not all economic indicators make the argument for postponing a May hike: unemployment has dropped to 4.2% from the 4.4% level seen around the time of the last MPC meeting. Also, wage growth is still seeing a reasonable pace of increase. While a hike this week appears to no longer be on the cards, the spots of strong data alongside desk views that Q1 weakness may be transitory will likely be enough validate a “hawkish hold”.

#Focus: Minutes:

The MPC minutes will probably go little further than simply confirming the MPC’s message that eventual increases in the Bank Rate will be limited and gradual. There seems to be little reason to voice any concern about the market’s pricing for future hikes – the yield curve still prices ~3 hikes which will most likely be supported by the MPC’s updated forecasts. Back at the February minutes, the MPC “judge(d) that, were the economy to evolve broadly in line with the February Inflation Report projections, monetary policy would need to be tightened somewhat earlier and by a somewhat greater extent over the forecast period than anticipated at the time of the November Report, in order to return inflation sustainably to the target”. The March minutes confirmed that “an ongoing tightening of monetary policy over the forecast period would be appropriate to return inflation sustainably to its target at a more conventional horizon”. Given these two instances since the actual rate hike last year, desks think it would be too aggressive to tweak this signaling, instead expecting the main signal to come from the number of dissenters rather than a more explicit change in wording. Again, 7-2 appears to be market consensus for the vote count but, data aside, there are still emerging hawks on the MPC – particularly in light of Vlieghe’s “one or two quarter-point rate increases per year over the forecast period” comment.

#Focus: QIR

February’s QIR showed a central GDP growth projection of 1.8% for 2018 and 2019 and showed inflation remaining above the 2% level over the forecast horizon, to stand at +2.1% in Q1 2021 (shown below). Most desks are looking for downward revisions to this year’s GDP, even if there is a rebound in economic activity in Q2. That said, there is little reason for the MPC to do away with their forecasts further out at this juncture. There is an expectation for the CPI profile to be softer in the near terms, recognizing the recent downward trend since the start of the year. Most expect inflation to remain a touch above 2% at the 2-3y horizon, implying the MPC still  holds the view that a “very gradual” series of rate hikes are necessary  (as suggested by their conditioning assumptions) to bring inflation back to target. The BoE’s forecasts will be based on the the exchange rate, yield curve level and oil prices that prevailed heading into the beginning of the forecasting process. It is worth flagging that sterling has fallen relatively sharply from the 1.4377 mid-April highs down to 1.3510 at the time of writing but given the timing of this move, trade-weighted sterling is actually ~0.8% stronger than at the February Inflation Report. On the other hand, oil prices have firmed significantly with much focus on Iran tensions, dragging the inflation projections the other way.

Inflation Report Projection (# respondents expecting change)

February QIR Forecast Summary:

Annual Average GDP growth rate projection:

Q4 CPI Inflation projections:

Street Views:

-BAML: recent data makes a May hike unlikely; cannot entirely rule out May given MPC’s historic willingness to sound hawkish in the face of weak data; less conviction on voting pattern, expecting 7-2 again but 6-3 or 5-4 not out of the question; 7-2 would make a “hawkish hold” message hard to deliver

-Barcs: expect the May MPC meeting to deliver a “hawkish hold” as it reiterates its commitment to medium-term tightening; Carney faces the problem of a sceptical market that historically has struggled to price tightening from the MPC ahead of moves; a 7-2 split vote may help persuade the market of the MPC’s resolve to maintain a tightening bias

-BNP: data concerns will keep BoE on hold; expect Bank to revise growth and infl f/c down by 0.2pp in the near term while keeping medium-term projections broadly unchanged; expect 9-0 vote for unchanged rates; given domestic px pressures remain elevated, MPC will likely keep a hawkish bias

-Citi: expecting modest downgrades to growth and inflation f/c; bank may view recent growth/infl weakness as temporary; MPC will acknowledge uncertainty about economic outlook but still looking for 7-2 on rates; communication will have enough “hawkishness” to keep prospects for August hike on the table, although August hike is a close call, 3-months may not be enough to eliminate uncertainty

-Danske: not longer expect May hike with 7-2 on rates; shift call to August with a “hawkish hold” this Thursday given mkt pricing and recent softer data; now expect August hike to be the only one this year; change call to only one hike next year (prob in May 2019) from two previously

-HSBC: changed long held view on 29th April; expect BoE on hold at May meeting with 7-2 vote on rates with Saunders/McCafferty dissenting again; recent MPC comments and weaker data likely to cause MPC to wait for clearer steer on underlying trend in activity; outlook points to no further rate hikes this year or next;  they move from “May and done” to just “done”

-Investec: the soft run of data and Carney comments make the outlook less clear than usual; MPC does not have to be “heroic” over whether sluggishness is temporary at this juncture, recent drop in CPI gives BoE some cover in delaying a hike; expect d/ward revision to GDP; Carney likely to stress uncertainty on soft data and dependency on how big numbers evolve; now expect a 25bp hike in August with x2 hikes in 2019, based on premise that GDP growth returns to levels prior to start of the year… if not then they look for v slow hikes over next 18m if at all

-JPM: GDP report send a clear message that BoE will pause in May; Inflation Report will keep a H2’18 rate hike in place; “hawkish hold” is now more likely than a “dovish hike” expected 2wks ago

-Lloyds: (my winner for best title “Chilly Gone Carney”) expect rates on hold with the next move like in August, given Carney’s “wobble” and the more sober assessment of domestic economic activity

-MS: shifted call for May hike out to August; data has sown enough doubt in MPC swing-voters minds (ie. Broadbent/Vlieghe/Haldane) to derail a hike

-Nomura:  no longer expect a May hike, “hawkish hold” is the most likely outcome

-NWM: expect 7-2 vote with McCafferty and Saunders maintaining call for immediate hike; CPI inflation projections at the 2-3y horizon should continue to show an overshoot of the target, signalling an ongoing tightening bias; failure to deliver a relatively well flagged rate hike will impair MPC credibility and signaling prowess; expect the first (and now only) 25bp hike to come in August (remove call for Nov ’18 hike)

-UBS: expects 7-2 vote on rates in May; ended call for May hike; reverted to prior f/c of BoE on hold over forecast horizon; case for higher rates is looking increasingly threadbare from both real activity and inflation standpoints

What’s (not) Priced In:

As has been well flagged, the sterling curve has seen a sharp post-Carney/data repricing. At the March meeting, expectations were high (~85%) for a hike at the May meeting – we now have a only 2.8bp (~11%) priced in for Thursday. The next hike is virtually fully priced in for the November ’18 meeting.

Recent Comments:

April 20 – Michael Saunders: “We do not need to set policy in a way that will create rising spare capacity or higher unemployment. But our foot no longer needs to be so firmly on the accelerator”

April 19 – Mark Carney: “I am sure there will be some differences of view but it is a view we will take in early May, conscious that there are other meetings over the course of this year”

April 10 – Ian McCafferty: “We shouldn’t dally when it comes to tightening policy”

March 23 – Gertjan Vlieghe: “Provided the balance between global tailwinds and Brexit headwinds remains where it is now, supporting U.K. growth at or above potential, and provided evidence continues to  accumulate that a tight labor market is actually pushing up domestic inflationary pressures, I expect that bank rate will need to rise further over the forecast period,” he said. “The current central outlook is, in my view, consistent with one or two quarter-point rate increases per year over the forecast period”