The Bank of England Preview: MPC to hold rates steady as the inflation outlook remains anchored

 

• The Bank of England rate-setting Monetary Policy Committee is expected to hold the Bank rate unchanged at 0.50% in June in a 7-2 vote pattern.
• Headline inflation remained unchanged at 2.4% in May with core inflation at 2.1% y/y, but the UK labor market saw strong job creation indicating that the first-quarter GDP slowdown was potentially a temporary blip.
• Wage growth in the UK remains muted dwelling below 3.0% y/y with real wages barely positive.
• The hawkish twist in the monetary policy statement or hawkish turn in the voting pattern is expected to support GBP/USD that fell almost 12 big figures since Apri 17 this year.

The Bank of England (BoE) nine members strong Monetary Policy Committee (MPC) is expected to hold the Bank rate at 0.50% and the volume of the asset purchasing unchanged this Thursday, June 21, when deciding on monetary policy at the Threadneedle street in London.

In what is seen as divided MPC, there are only two arch-hawks, Ian McCafferty and Michael Saunders, that permanently favor the rate hike since March this year with their backing of a rate hike in June expected as well.

On the other side of the spectrum are two arch-doves, Deputy Governor Dave Ramsden and John Cunliffe, who favored the Bank rate to remain at all-time low also in November last year, when MPC decided to hike the Bank rate to 0.50%.

The vote decomposition is expected to remain 7-2 in favor of the Bank rate remaining unchanged in June, but any hawkish turn meaning 6-3 or even 5-4 should support GBP/USD strongly because for the forex market this would be a very clear and very strong signal of the MPC hiking rates as early as in August 2, when BoE publishes its newest Inflation Report accompanied with the Bank of England Governor press conference. 

Brexit uncertainty remains in place

The MPC has already said that Brexit represents the greatest deal of uncertainty for the economic outlook in the UK and with the key Brexit laws voting in both House of Lords and House of Commons due this week, it is unlikely for BoE to act, especially as the position of the UK in averting a hard Irish border remains inconclusive with the EU highlighting  that customs union without participation to the EU Internal Market does not entirely eliminate border controls. This leaves the issue of the Irish border unresolved one month ahead of the EU’s target date.

Inflation outlook

The headline inflation in the UK stabilized at 2.4% y/y in May while the core inflation stripping the consumer basket off the energy and food prices also remained stagnant at 2.1% y/y in May. This means, that the inflation relatively swiftly decelerated from the cyclical peak of 3.1% y/y in November last year closer to BoE’s 2% inflation target. 

Regarding the outlook for inflation, the deceleration is factoring two important trends. The first one is the external factors like higher oil prices and higher Sterling’s exchange rate and the second one stronger domestic price pressures stemming from wage growth.

The base effect of the might push the inflation rate over the year higher during this summer, but the outlook for inflation remains mixed as inflationary effects of the Brexit-related fall of Sterling are dissipating quite fast and with the UK wage growth below 3.0%, domestic price pressures are lower than expected.

In combination with the inflation expectations steadily anchored at 2.9% y/y in one year period from now, according to the Bank of England survey, the stage is set for a prolonged period of interest rate stability in the UK.

The decade of the UK inflation, May 2008-2018