The monthly Bank of England meeting is taking place today, with the interest rate announcement due at midday. The committee are widely expected to raise rates again by 0.25%, but as the US Fed meeting yesterday highlighted, central bank meetings can offer high volatility for stocks, FX and bonds. Here’s what we’re watching out for.
Unity of a hike
Clearly, if the BoE don’t raise rates today, it would be a large surprise for markets. This would see the FTSE 100 shoot higher, with GBP dropping like a stone. Bond yields would also likely come lower.
However, we think the chance of this happening is very slim. Aside from the 0.25% hike, we are watching whether the decision is unanimous or not. The committee of 9 members just needs a majority to raise interest rates. So if the call is 6-3 of 7-2, the dissent will be noted. If the dissenters voted for 0.5% of 0.75% hikes, this would be bullish for the future. This would likely cause stocks to fall, while GBP could strengthen.
Alternatively, if the dissenters voted for no hike, this wouldn’t be a positive signal.
The outlook for inflation
The next point we are watching for is the inflation outlook. After all, the reason why we are looking at the fifth consecutive rate rise is to try and stem inflation that’s running well above target. At the moment, the forecasts indicate that inflation should come lower over the next year. Yet since the last meeting in May, inflation was higher than expected.
This could cause the Bank of England to raise inflation figures. The impact of this ties in really with the growth forecasts. If inflation is revised up and growth forecasts revised down, this isn’t a good mix at all. This would likely be negative for stocks and FX.
On the other hand, if inflation expectations fall, bond yields will also likely fall, given that the need for rate increases diminishes.
Who is the Bank of England following?
The final point we are looking for is the overall tone of what stance the BoE will take to deal with the current struggles. It might follow the US Fed, which aggressively raised rates by 0.75% last night and came out all guns blazing. Or it might follow the European Central Bank, that has been a lot more conservative in the desire to make any significant changes to monetary policy.
We personally think the BoE will lean to being more like the ECB, which we don’t feel is a good thing.
Overall, we think today will yield a 0.25% hike but a gloomy outlook for the UK economy. We think this could lead to GBP weakness, but would be supportive for the FTSE 100.