BOE Fireworks Possible as Fed Outlook May Spark More Votes for Rate Rises
The Bank of England will publish new forecasts in Thursday's Inflation Report and will also publish minutes of the latest rate-setting meeting on the same day, providing important insight on when U.K. interest rates may rise. This month's is particularly significant as Carney has repeatedly said the timing of any increase will come into greater focus near the end of this year.
The latest statement from the Federal Reserve, suggesting rates could rise in the U.S. as soon as December, may encourage the U.K.'s rate setters to challenge the market's view of when it may lift rates, Nomura and Credit Suisse analysts say.
MPC-dated Sonia forwards price first the first BOE rate increase in November 2016, seven months later than was priced at the time of the August 6 Inflation Report, adding to the possibility that the bank's Governor Mark Carney will challenge market expectations.
- VOTE SPLIT: One vote for rates to rise.
- TIMING OF FIRST RATE RISE: 2Q 2016.
- WILL THE BOE PUSH BACK ON MARKET PRICING: Expect BOE to signal that sterling forward curve is too flat; may attempt to do this by an inflation target above 2 percent three years ahead.
- WHAT ELSE: Press conference may become dovish if, as Goldman expects, Carney says the MPC will need to be watchful that downside risks don't materialize.
- VOTE SPLIT: 8-1.
- TIMING OF FIRST RATE RISE: Changed forecast for BOE first rate rise to 2Q 2016 vs 1Q 2016 on Sept. 21.
- WILL THE BOE PUSH BACK ON MARKET PRICING: If MPC sees market pricing as too conservative, may adjust "ribbon'' inflation chart to show a more than 50 percent chance of inflation overshooting 2 percent at the 2Y-3Y horizon.
- WHAT ELSE: Watch emphasis the MPC places on 3Q productivity growth and potential inflationary pressures vs rising short-term unemployment, putting downward pressure on wage growth.
- VOTE SPLIT: Either Kristin Forbes or Martin Weale may join Ian McCafferty and vote for a rate rise.
- TIMING OF FIRST RATE RISE: Feb. 2016, with a risk that it takes place in May instead.
- WILL THE BOE PUSH BACK ON MARKET PRICING: Expect 2-year and 3-year inflation estimate significantly above 2 percent, sending a clear signal the MPC expects to lift rates before 1Q 2017; inflation profile using unchanged monetary policy also worth watching as any downgrade suggests MPC more comfortable with a 2H liftoff.
- WHAT ELSE: Watch comments about global macroeconomic developments.
- VOTE SPLIT: 8-1, although a second dissent wouldn't be a surprise. Softer growth data may stop others voting with McCafferty for higher rates, while Andy Haldane is close to voting for a cut.
- TIMING OF FIRST RATE RISE: 2Q 2016.
- WILL THE BOE PUSH BACK ON MARKET PRICING: Report may sound hawkish vs market pricing with an inflation forecast (conditioned on market rates) above 2 percent in 2018, and Carney warning rates may need to start slow adjustment before long.
- WHAT ELSE: BOE may revise down its growth forecast and say is in no rush to raise rates.
- VOTE SPLIT: Doesn't expect any additional dissenters. Even if Kristin Forbes or Martin Weale were to vote for an increase that needn't change the most likely outlook for monetary policy, which is dependent on the internal MPC members, who are more dovish.
- TIMING OF FIRST RATE RISE: Pushed back timing of rate rise to May vs Feb. on Oct. 5.
- WILL THE BOE PUSH BACK ON MARKET PRICING: With the Fed's liftoff appearing closer, the MPC should be comfortable guiding the more cyclically advanced U.K. economy toward expecting earlier increases than the market is pricing.
- WHAT ELSE: Positioning for a hawkish message hasn't been profitable at previous reports; only one of the nine Inflation Reports by Carney led to higher 12-month forward rate expectations.
- VOTE SPLIT: 7-2.
- TIMING OF FIRST RATE RISE: Feb. 2016.
- WILL THE BOE PUSH BACK ON MARKET PRICING: There's a case for the Bank pushing its inflation projection higher but any revisions may be somewhat diluted by developments in labor market and slack.
- WHAT ELSE: Market is underestimating the risk of some hawk-friendly signals. Even if Thursday's report doesn't provide clues suggesting a Feb. liftoff, the first move is still more likely in 1H 2016 than a year from now, which is where market currently prices.
- VOTE SPLIT: 7-2; chance Kristin Forbes and/or Martin Weale may join McCafferty calling for a rate rise.
- TIMING OF FIRST RATE RISE: More MPC votes for an increase would support call for Feb. 2016.
- WILL THE BOE PUSH BACK ON MARKET PRICING: Expect downward revision to MPC's near-term inflation estimate and an above target by late 2017, signaling the MPC envisages tightening earlier than market does.
- WHAT ELSE: MPC very divided so any commitments seem unlikely, especially given importance of Friday's non-farm payrolls in the US. The immediate market reaction will likely focus on the vote.
- VOTE SPLIT: 8-1.
- TIMING OF FIRST RATE RISE: May 2016.
- WILL THE BOE PUSH BACK ON MARKET PRICING: Look for inflation fan chart to continue to show an overshoot of the 2 percent target in the third year of the forecast; if it doesn't, the MPC will effectively be signaling rates don't need to go up until at least early 2017.
- WHAT ELSE: Risk/reward still favors small short bias in the front-end; continue to prefer paying 5Y on the 2s5s10s GBP curve. The increased probability of Fed liftoff in December also likely supports the trade.
- VOTE SPLIT: Chance Kristin Forbes votes for a rate rise at this meeting. Even so doubt has any broader implications for the policy outlook.
- WILL THE BOE PUSH BACK ON MARKET PRICING: BOE will likely not spend much energy pushing against market pricing, although central view will probably be liftoff in 2016. Inflation will likely be forecast to overshoot the target at the very end of the forecast horizon, and by just a touch.
- WHAT ELSE: Fed leaving the door open to a December liftoff probably makes BOE more comfortable keeping the prospect of a rate rise in first half of 2016 alive.
- VOTE SPLIT: Kristin Forbes to join Ian McCafferty and that could be helpful for the rest of the MPC as it could act as a catalyst for the rise in market rate expectations most of them may be keen to achieve.
- TIMING OF FIRST RATE RISE: 1Q 2016.
- WILL THE BOE PUSH BACK ON MARKET PRICING: Key issue for MPC will be whether and how to lean against flatness of market expectations for Bank rate given these are more dovish than at time of Aug. Inflation Report. MPC may allow its medium term inflation forecast to drift a touch above the 2 percent target, sending a message that markets have become too dovish.