GBP: BoE watching - Rabobank

Jane Foley, Research Analyst at Rabobank, suggests that the Federal Reserve may be primed to take centre stage this week, but the BoE will be also be providing policy direction. 

Key Quotes

“It doesn’t come as much of a surprise that all respondents to the Bloomberg survey of BoE policy expectations expect steady policy to prevail this week.  Of more interest is that fact that the results of the survey suggest that policy is expected to remain on hold for a prolonged period before the Bank starts to tighten in 2019.  Although this prediction is closely aligned with our own view, uncertainty related to the Brexit process suggests that there may be some fluidity in this outlook.”

“The FT reporting that a bi-annual survey conducted with the ICSA has found that three-quarters of FTSE350 company secretaries expect UK economic conditions to deteriorate during the next 12 months.  The poor showing of this survey sits well with the prediction of the Office of Budget responsibility which suggests that growth in the UK economic is likely to be 2.4% less over the next five years as a consequence of Brexit than would otherwise be the case.   This backdrop suggests that BoE policy is likely to remains extremely accommodative.  That said, the BoE’s monetary policy committee last month withdrew its guidance that rates may be cuts again this year and warned instead that there was only so much inflation that it was prepared to looks through.”

“The sharp fall in the value of GBP during October was likely a factor behind the Bank’s decision to back away from its previous guidance to leave rates unchanged in November.  This month we expect the MPC to signal that there is currently no bias on the direction of the next move.  If the MPC do feel to need to nip inflation expectations in the bud it is possible that the MPC could hint that the chances of a rate hike are equally balanced with the risk of a cut.  Assuming no new political surprises this week, this should be enough to put a floor under the pound near-term.”