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The year 2016 was supposed to be the year when rate rises came through with a degree of regularity. However, as the Federal Reserve dithers on its next move, the Bank of England looks to be moving further and further away from any increase in interest rates. This week’s meeting and inflation report may be the moment when the doves take over from the hawks.
Both the inflation forecast and the current growth outlook could take a hit when the inflation report comes out. JPMorgan has already warned of a possible cut to GDP growth, with the official estimate going down to 2% for 2016, from 2.2%. Inflation forecasts may also take a hit, and if the estimate for CPI is cut to under 2% by 2018, then we may see a hit to sterling on increased expectations of an interest rate cut.
For the Bank of England, the picture is complicated by the Brexit referendum. Recent PMI figures have indicated that the second-quarter’s growth may well be slower than that seen in the first three months of the year. The EU question has played a part, but the growing economic malaise runs deeper than just hesitancy over the UK’s direction in Europe.
With rates at 0.5% the potential impact of a rate cut would appear to be limited. However, the real effect is related to the message that this would send to markets, and any hint that a move is even being discussed is likely to put downward pressure on sterling. Markets are, fundamentally, forward-looking, and for the time being they seem unperturbed by the apparent rise in support for the ‘Leave’ campaign. What may bother them, however, is the idea that the BoE is about to start cutting rates and loosening policy, with its concomitant implication that the UK economy is weakening.
It is certain that the bank has a tricky time ahead of it, but even after the Brexit referendum it will face questions over how it copes with low inflation and an uncertain economic recovery. Mark Carney’s decision to cut down on the number of meetings may reduce the time he has to spend in front of TV cameras, but it will not change the fact that the bank has its work cut out over the next year.