Assessing Risks Into Thursday’s BOE Decision
Dutch bank ING thinks the Bank of England (BOE) will vote 6-2 this week to leave UK interest rates unchanged at 0.25 per cent on Thursday. Germany’s Deutsche Bank agrees “that UK monetary policy will remain unchanged again in August” but that “at least 2 MPC members are likely to be still voting for policy tightening.” Those views seem pretty representative with Reuters stating that “most economists expect a 6-2 vote to keep rates on hold, with an outside chance of another 5-3 split if Haldane follows through and changes his vote.” But if the vote seems a foregone conclusion why should traders who look at sterling care about this week’s BOE announcement? The answer is simple. If the broad message from the sell side is no change in UK rates, then the presumption must be the value of sterling (GBPUSD, EURGBP, GBPJPY) going into the announcement will reflect that view. Consequently, if the Bank of England, often affectionately known by traders as the Old Lady, makes any kind of intimation that could be interpreted in a more hawkish light, the markets could be wrong-footed. As Deutsche wrote, “in terms of market implications, short end sterling rates imply a less than 10 per cent chance of tightening at [the] meeting, and a slightly less than 50 per cent chance of a hike by year-end. Relative to market pricing, then, the risks are perhaps that the Bank sounds slightly more hawkish than market expectations.” Traders don’t necessarily have to agree with Japan’s Nomura Bank that the BOE may well hike by 25 basis points but nor should they exclude the possibility that the Old Lady could stand pat but put a slightly hawkish gloss on that decision.
Written by Neal Kimberley, External Currency Analyst.