Bank of England rate preview: inflation and yields unlikely to cause major hawkish shift
The Bank of England will feel more confident after a successful vaccination drive, yet traders will be looking out for any hawkish shift in the face of an economic resurgence.
When and where?
The Bank of England (BoE) will conclude their latest monetary policy meeting at midday, on Thursday 18 March 2021.
Tune in to IGTV’s live BoE announcement and analysis at 11:55 AM BST on Thursday in the IG platform.
Inflation and rising yields the key topic for central banks?
The BoE have been caught in a phase of uncertainty, with question marks over Brexit leading to a degree of hesitancy over committing to any particular direction for monetary policy.
In fact, the UK vaccination efforts and relatively calm Brexit process has provided a greater degree of confidence than many would have expected at this point. That reopening drive does raise questions of whether the BoE’s focus should shift away from loosening and towards a potential tightening.
The US looks likely to lead the path for the West, with the recent stimulus package serving to lift both growth and inflation expectations. However, the vaccination efforts in the UK have also lifted expectations for forthcoming growth, with the Organisation for Economic Co-operation and Development (OECD) forecasts providing an impressive 0.9% upgrade to their 2021 prediction.
With the UK set to gradually open in the coming months, there is little grounds for the BoE to continue posturing over the potential for negative rates going forward.
Yes, it is something the committee may continue to mention given the fact that they are currently at the threshold.
However, unless we see the vaccination efforts completely undermined by a new strain that takes us back to square one, it is highly unlikely that we will see the BoE take rates into negative territory.
Instead, the question is whether the BoE will decide to act if we see a spike in inflation, led by a surge in consumption in the coming months. Recent commentary from Governor Andrew Bailey suggests that the Monetary Policy Committee (MPC) will be willing to tolerate a short-term spike, with consumer price index (CPI) expected to settle back below the 2% mark.
Bailey has also alluded to holding similar views to his Federal Reserve (Fed) counterpart Fed Chair Jerome Powell, with both seeing the recent rise in treasury yields as a vote of confidence in the improving economic outlook.
Thus, with the bank currently priced at 99.7% likely to keep rates steady, the question is more about tolerance levels and their outlook in the wake of recent developments.
The table below highlights how markets see little chance of a rate hike this year. However, it will be key to see how these future expectations shift in the wake of this meeting.
Where now for the pound?
GBP/USD has been weakening into this meeting, with a bout of dollar strength seeing the consistent uptrend come under pressure. That pullback has taken the pair into a deep Fibonacci retracement zone and the ascending line drawn using a standard deviation channel.
That signals a potential resurgence from here, with a breakdown below the $1.3566 level required to bring an end to this six month uptrend.
The BoE seems unlikely to tout a particularly hawkish line this time around and thus there is a good chance of seeing the pair start to regain ground before long. However, the existence of the Federal Open Market Committee (FOMC) meeting also provides another source of volatility ahead for cable traders.
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Bank of England meeting
An in-depth look at the effects of the BoE’s interest rate announcement ahead of the next MPC meeting on 1 August 2019.
- What was decided at the last BoE meeting?
- How does the MPC influence inflation?
- How might the pound be affected by the next meeting?
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