Thursday’s Bank of England (BoE) meeting represents the most hotly anticipated event of the week, with the central bank expected to raise rates for the first time in a decade. Unlike the European Central Bank (ECB) or Federal Reserve (Fed), this tightening phase has more to do with economic weakness than it does with strength. Mainly because import driven inflation is forcing their hand, thanks to the devaluation of the pound (GBP). This fact extends itself to the nature of future UK monetary policy too. While the US is raising rates, with the prospect of further increases going forward, there is a feeling that the BoE is simply raising rates as a precursor to cutting them, in case the economy takes a hit in the latter stages of the Brexit negotiations. This notion that any rate cuts are likely to be short-lived will have an impact on the market reaction. It will limit the GBP upside, compared with a rate rise, which is the precursor to a raft of further hikes. The market reaction is likely to centre on a number of points that traders must keep an eye out for.
First is the obvious question of whether the BoE will actually raise rates; recent tones from the BoE would lead us to believe so. With the market expectations of a rate hike standing at 87%, there is certainly an overwhelming feeling that the BoE will act. To some degree it’s worth noting that 87% of the move could be factored in, with a decision to not act likely to bring a sharp devaluation in the pound. It's also important to note exactly how the members vote; a unanimous decision will obviously carry more weight than a fragmented one.
Another issue to keep an eye out for is what the tone will be around the decision. Should the BoE decide to hold off on raising rates, the market reaction will likely be a big move against the pound. However, should the bank provide guidance that leads us to believe a hike would be likely next time around, it would obviously lessen the impact. Similarly, should we see the bank raise rates, they will also have to outline their stance for future monetary policy changes.
Finally, this meeting is denoted ‘Super Thursday’, owing to the release of the inflation report, which includes a raft of economic forecasts. Those inflation and gross domestic product (GDP) forecasts will be crucial in determining where the BoE sees future monetary policy. Most notable are the inflation figures, given that further consumer price index (CPI) upside could push the BoE into raising rates again in the future.