Concerning asset purchases, it’s likely that Andy Haldane (BoE Chief Economist) will vote in favor of a GBP 50bln decrease in QE. Market participants will likely dismiss his vote as it is his last meeting. Instead, attention will be paid to whether any other members dissent. This meeting is not a quarterly MPR, so it tends to be more of a stock-taking exercise. However, expectations for a more hawkish BoE are increasing after the Fed’s unexpected hawkish surprise.
UK Economy: The May meeting was positive. UK growth has seen a boost due to the economy’s reopening. At 2.3%, the most recent monthly GDP number beat all expectations. The BoE will likely reiterate its belief that growth can reach pre-pandemic levels in the remaining months of the year. The UK CPI increased to 2.1%. This was higher than the BoE’s target, and somewhat faster than the MPC had anticipated. They saw inflation near target in the short term, rising temporarily above their 2% target towards end of the year, and peaking at 2.5% Q4. The BoE may see higher inflation as being more sticky than originally thought, according to survey data (PMIs). The labour market is recovering with the unemployment rate falling to 4.7% from 4.9% at the last meeting. Wage growth has also seen a noticeable pick-up, which increases the upside risks to the inflation outlook.
BoE Commentary: Vlieghe, who was the first to speak on the MPC about rate increases in 2022, is perhaps the most notable comment from the BoE. Vlieghe has left the BoE after the August meeting. However, the fact that Vlieghe tends to be more dovish and is now pointing out scenarios where a rate increase in 2022 might be appropriate is significant. This gives an indication of the core MPC members’ stance. Overall, the BoE’s messaging seems to be more hawkish.
As I have mentioned, there have been expectations for a more hawkish BoE after the FOMC meeting. This is likely to have been further exacerbated by shadow boards’ very hawkish assessment. The Times BoE shadow MPC of nine members said that the central bank should stop the final GBP 50bln QE. Four members suggested that the Bank should increase rates before the end. While this may not happen, it highlights the fact that the BoE has good reasons to be optimistic about the outlook.
Market Reaction
This is not an MPR, so any changes to BoE guidance will likely wait until August. The Bank will likely also taper its asset purchases. The accompanying statement will be the focus of attention as risks are more hawkish. A shift in the perception of short-term growth as “broadly balanced”, or acknowledgment that inflation might be slightly sticky than originally thought, could lead to a more hawkish view. However, GBP positioning is still long heading into the meeting with the move of 1.38 to 1.40 at the start of the week highlighting this. The GBP/ USD AMT overnight implied volatility indicates an implied move between 0.5% and 1.40 (or 66pips).
