ITC BoE Preview: Discussing the Downside

In Brief:

-MPC likely to vote 7-2 to keep rates on hold (McCafferty/Saunders dissenting again)
-focus on collective interpretation of the persistence of Q1 weakness
-watch discussion around heightened political risks and downside risks to economy
-MPC likely to reiterate case for “limited and gradual” increase in rates over coming years

Thursday 21st June 2018:

-MPC Rate Announcement/Minutes (12:00 bst)

The MPC will meet on Thursday against a backdrop of weakening economic data, subdued inflation pressures and more Brexit-related political upheaval than Theresa May’s government would like. Analysts broadly expect a re-run of the May 10th meeting with the Bank Rate left unchanged at 0.50%, and all QE parameters on hold. The central view is for another 7-2 vote on rates with McCafferty and Saunders dissenting, having also done so at the March and May meetings earlier this year.

#Focus: Minutes:

The May MPC minutes argued “the recent weakness in data for the first quarter had been consistent with a  temporary soft patch, with few implications for the current degree of slack or for the outlook for the UK economy”. At the time they believed that conditions for steady growth were still in place, the UK labour market remained strong and survey indicators suggested activity growth would pick up again in Q2. Broadly speaking, the minutes conveyed two key points: Firstly, that the MPC would be looking closely at economic data to ascertain whether Q1 softness would continue, believing at the time that the “costs to waiting” for additional information were likely to be modest. Secondly that the MPC’s best collective judgement was for “an ongoing tightening of monetary policy over the forecast period… to return inflation sustainably to its target at a conventional horizon”. The minutes this time round will likely restate the MPC preference for any future increases in Bank Rate to be at a “gradual pace and to a limited extent”.

#Focus: Data

Back on 25th May, the ONS left its second look at Q1 GDP growth unchanged at +0.1% q/q, with the break down of the data showing a slowing in business investment and consumer spending. At the time, the ONS flagged that poor weather did have an effect on some industries although its disruptive effect was generally small. The ONS did point out that recent data implied a more protracted slow down for companies in the services sector, which would seem at odds with the MPC’s assessment in the May minutes. This statement alone will likely give the Committee food for thought this week: we will be looking for any changes to their collective outlook into Q2 and how “persistent” Q1 weakness may now be perceived.

#Focus: Communication

Aside from the minutes it’s worth looking at recent comments from MPC members (detailed below). Carney recently described two possible paths for Brexit discussions: a smooth transition (MPC’s base case) or a more “disorderly” one, where the result produces “materially different” outcomes from the MPC’s current assumptions. Under the latter, the MPC’s response would adopt the same framework as seen after the referendum itself. Elsewhere, Tenreyro noted signs of slowing growth but also reiterated that gradual increases in the Bank Rate would be warranted over the coming years, although the precise timing was “an open question”. Ramsden, one of the more dovish/cautious members of the MPC, has flagged risks in both directions. All considered, it’s fair to say that downside risks from economic data, and political risks from Brexit discussions are on the rise and will almost inevitably feature in the minutes this Thursday.

Street Views:

-Barcs:  latest round of data points to a soft path in H1; expect MPC to largely replay the May meeting and reiterate in wait-and-see mode, possibly with even lower conviction, which could cool expectations for an August hike; they flag recent Ramsden comments that short-term momentum is unlikely to be impressive despite better wages; they note that at the Aug 2 MPC, members will only have the first release of monthly GDP for May due to the ONS revamping their national accounts release calendar; they believe an August hike would be too much of a gamble even if monthly data showed improvements by August

-BAML: expect MPC to keep August “live” in the minutes of this week’s meeting; recent data has been mixed with “better releases” likely impacted by the Royal Wedding and weather-related spending; they note the slowing in wage growth in April (incl bonusees) with little signs of momentum; overall data flow remains weaker than BoE’s May forecasts

-Citi: expect BoE to hold policy settings unch at this meeting; they note the mix of data, some encouraging, others more mixed; BoE can afford to wait for more info and new forecasts at August meeting before passing judgement on whether another 25bp hike is warranted; they will also be watching comments from Carney due on 21/06 at 21:15bst at Mansion House for any signals

-GS: expect a 7-2 vote for no change in the Bank Rate; Q2 GDP growth is tracking below the MPC’s forecast and private sector pay has softened; expect the MPC to acknowledge the possibility that Q1 weakness may reflect a more persistent slowdown than envisaged in May; expect MPC to remain ambiguous over the precise timing of any incremental tightening, will likely restate “limited and gradual” over coming years; minutes should allude to heightened political risks from Brexit; base case remains for next 25bp hike in Nov

-HSBC: expecting 7-2 vote to keep rates on hold at 0.5% with McCafferty/Saunders dissenting again; looking for any signals for a possible hike in August; key will be MPC assessment whether Q1 weakness was transient or whether there is now more to worry about; they note the slightly weaker global demand picture and increase in Brexit-related noise; MPC may well remain in hawkish mode; recent MPC comments have been upbeat; they see no further rate hikes this year or next but June vote/mins/statement should help clarify view

-Lloyds: expect voting pattern to remain split at McCafferty/Saunders still calling for a hike; little fresh evidence to suggest a rebound from Q1 weakness sets MPC up for a re-run of May; expect MPC’s med-term views to be broadly unchanged, highlighting the need for modest increases in rates over the forecast horizon

-NWM: expecting a repeat from May with 7-2 on rates; main focus will be whether the MPC dilutes its “hawkish” guidance; UK activity data has missed expectations and inflation pressure remains muted, near term developments are thwarting BoE policy tightening; they abandon their forecast for a 25bp hike in August, now expecting the Bank Rate for 0.5% through to end-2018; risks tilted toward some modest tightening around Q1 2019 but will remain contingent on a materially softer Brexit outcome; they flag Carney’s Mansion House speech on the same day, seeing less scope for a mixed message but also note speeches from Carney at that location have rocked the market in the past

What’s Priced In:

MPC-dated SONIA have modestly pared back some of the expectations for a higher interest rates over the coming meetings, although the 2nd August meeting still roughly looks a 50-50 chance of a 25bp hike, as was the case at close of business after the 10th May meeting. The next hike is fully priced in around Feb’19 (ie. Around “Brexit-day”), versus being fully priced by November ’18 as we headed into the May meeting.

Recent Comments:

June 7 – David Ramsden: “Looking ahead, my central expectation for the economy is in line with the MPC’s best collective judgement as expressed in our inflation report forecasts.”

June 6 – Ian McCafferty: “There are two of us over the course of the last few months that have been strongly arguing that we need to make the next rate rise relatively quickly. It is only of a quarter point and I’m not  arguing for anything dramatic beyond that at this stage, but we do think that if we leave it too late then we will see some pick up in inflation that will be harder to deal with, and would probably require interest rates going up rather faster later on if we get behind what we should be doing.”

June 4 – Silvana Tenreyro: “While I anticipate that a few rate rises will be needed, the timing of those rate rises is an open question”

May 25 – Mark Carney: “We have learned a lot about the effectiveness of asset purchases and we do think guidance has a role as well, but it would be more comfortable if we were in a position where we could use  the conventional, the most powerful, the most efficient instrument, which is bank rate.”

May 24 – Mark Carney: “As the committee has made clear before, its guidance about the likely gentle path of rate increases depends on the economy evolving broadly as expected — in particular, whether growth in  demand exceeds that of supply”

May 24 – David Ramsden: “Our communications have been clear and consistent. We’ve always made clear that the ultimate policy choices would be determined by the data. What happened between February and May is that the data changed, and that framed our decision.”

May 22 – Mark Carney: “What happened is the economy did not, in the first quarter, evolve broadly in line with our forecast. Inflation came in lower, economic momentum, a number of signs were lower, then ultimately the hard data came in lower as well. And we as a committee stepped back, looked at that data and took our own assessments”

May 22 – Gertjan Vlieghe: “As I have outlined in my most recent speech, my current forecast for growth and inflation is consistent with a gradually rising path of interest rates. My own central projection will require one or two quarter-point rate increases per year over the three-year forecast period. That path would bring us closer to the neutral policy rate, which I continue to think is likely to be well below the neutral rate that prevailed before the recession”

May 15 – Ben Broadbent: “Our communication is mainly addressed to the wider public. My own view is, having done it, and even accepting that it’s maybe analytically a harder job, they can look after themselves.”

May 10 – Mark Carney: “It’s likely over the course the next year that interest rates will go up, likely by the end of the year”

Author: Michael Read