Doves are firmly in control of BoE meeting – Preview
October 31, 2023 10:28 am
The Bank of England meets as geopolitical developments affect market sentiment
Another pause is priced in but Wednesday’s Fed gathering could unsettle expectations
The statement is set for Thursday 12:00 GMT; press conference 30 minutes later
Calendar also includes the final Manufacturing and Services PMI prints
Data since September have been on the weak side
With the focus lately turned elsewhere, it has been a quiet month for the ΒοΕ, especially as its members continued to be less active when compared to their Fed and ECB counterparts. This comes after a difficult September BoE meeting, considering the 5-4 split vote in favour of a rate pause. Developments since then have been mixed as the late September upside surprise in the final GDP figure for the second quarter of 2023 was not followed by a plethora of stronger prints in other data releases.
More specifically, the property sector is a headache for the BoE as the various house price indices continue to show a contraction in prices. In addition, mortgage approvals remain in a downward trend and net lending is almost stagnant and potentially preparing for the first negative month-on-month print since August 2021. Also, retail sales continue to exhibit negative annual growth rates as consumer confidence shows further signs of deterioration.
Crucially, inflation edged higher in September but the same is not expected for October. This next inflation report will be released on November 15, and because of base effects, a strong deceleration in the annual figure is forecast. Governor Bailey has already been on the wires talking about this expectation, thus sending a strong signal to the hawks regarding Thursday’s meeting.
Will it be an easier meeting for Governor Bailey?
Therefore, the decision seems easier this time around with the market assigning only a 2% probability for a 25bps rate move on Thursday. Having said that, the focus will be on the voting pattern and the overall rhetoric. In terms of the former, a 6-3 voting result in favour of another rate pause is expected; thus, we are in for a surprise if the four hawks that supported a rate hike in September do not shift their votes.
Additionally, the market will also be looking for the “further tightening in monetary policy would be required if there were evidence of more persistent inflationary pressures” comment that appeared in the last statement, in order to gauge if the BoE decided to tone down its hawkishness. To be fair, the overall BoE meeting is bound to be affected by what the Fed announces the previous night (Wednesday). If the Fed opts for a hawkish stance, there could be some inclination by Bailey et al to follow suit, without shocking the market. Such an outcome could result in the rate cut expectations, currently priced by mid-2024, to be pushed slightly out.
Quarterly forecasts on the menu as well
The meeting also entails the quarterly Monetary policy Report, which includes the Bank’s quarterly forecasts. The last set of these projections at the August meeting showed inflation dropping to 1.7% by end-2025 but with risks skewed towards a stronger figure. A confirmation of these forecasts and/or an even weaker outlook in the examined horizon could put to bed the prospects of further rate hikes and bring forward expectations for the first rate cut.
The pound is on the backfoot since August
The euro-pound pair has been experiencing an aggressive uptrend since the August lows as the euro bulls are trying to recover part of their sizeable losses that occurred during 2023. This move is somewhat surprising considering the ECB’s change of stance and the weak data releases seen in the euro area lately. Therefore, the pound could benefit from this week’s events. A hawkish BoE and/or a tighter voting result could allow the euro-pound pair to move lower, potentially overcoming the support set by the busy 0.8670-0.8720 area. On the flip side, a dovish meeting would keep the door open for the euro bulls to plot a course towards the 0.8794-0.8815 range.
The Bank of England meets as geopolitical developments affect market sentiment
Another pause is priced in but Wednesday’s Fed gathering could unsettle expectations
The statement is set for Thursday 12:00 GMT; press conference 30 minutes later
Calendar also includes the final Manufacturing and Services PMI prints
Data since September have been on the weak side
With the focus lately turned elsewhere, it has been a quiet month for the ΒοΕ, especially as its members continued to be less active when compared to their Fed and ECB counterparts. This comes after a difficult September BoE meeting, considering the 5-4 split vote in favour of a rate pause. Developments since then have been mixed as the late September upside surprise in the final GDP figure for the second quarter of 2023 was not followed by a plethora of stronger prints in other data releases.
More specifically, the property sector is a headache for the BoE as the various house price indices continue to show a contraction in prices. In addition, mortgage approvals remain in a downward trend and net lending is almost stagnant and potentially preparing for the first negative month-on-month print since August 2021. Also, retail sales continue to exhibit negative annual growth rates as consumer confidence shows further signs of deterioration.
Crucially, inflation edged higher in September but the same is not expected for October. This next inflation report will be released on November 15, and because of base effects, a strong deceleration in the annual figure is forecast. Governor Bailey has already been on the wires talking about this expectation, thus sending a strong signal to the hawks regarding Thursday’s meeting.
Will it be an easier meeting for Governor Bailey?
Therefore, the decision seems easier this time around with the market assigning only a 2% probability for a 25bps rate move on Thursday. Having said that, the focus will be on the voting pattern and the overall rhetoric. In terms of the former, a 6-3 voting result in favour of another rate pause is expected; thus, we are in for a surprise if the four hawks that supported a rate hike in September do not shift their votes.
Additionally, the market will also be looking for the “further tightening in monetary policy would be required if there were evidence of more persistent inflationary pressures” comment that appeared in the last statement, in order to gauge if the BoE decided to tone down its hawkishness. To be fair, the overall BoE meeting is bound to be affected by what the Fed announces the previous night (Wednesday). If the Fed opts for a hawkish stance, there could be some inclination by Bailey et al to follow suit, without shocking the market. Such an outcome could result in the rate cut expectations, currently priced by mid-2024, to be pushed slightly out.
Quarterly forecasts on the menu as well
The meeting also entails the quarterly Monetary policy Report, which includes the Bank’s quarterly forecasts. The last set of these projections at the August meeting showed inflation dropping to 1.7% by end-2025 but with risks skewed towards a stronger figure. A confirmation of these forecasts and/or an even weaker outlook in the examined horizon could put to bed the prospects of further rate hikes and bring forward expectations for the first rate cut.
The pound is on the backfoot since August
The euro-pound pair has been experiencing an aggressive uptrend since the August lows as the euro bulls are trying to recover part of their sizeable losses that occurred during 2023. This move is somewhat surprising considering the ECB’s change of stance and the weak data releases seen in the euro area lately. Therefore, the pound could benefit from this week’s events. A hawkish BoE and/or a tighter voting result could allow the euro-pound pair to move lower, potentially overcoming the support set by the busy 0.8670-0.8720 area. On the flip side, a dovish meeting would keep the door open for the euro bulls to plot a course towards the 0.8794-0.8815 range.
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