Bank of England rate preview: will Carney cut one final time?
Mark Carney looks to close out his tenure with a final rate cut following a batch of questionable post-election data points.
When and where?
The first Bank of England (BoE) monetary policy decision of 2020 will be made at their London headquarters on Thursday 30 January. This will be the last meeting for Mark Carney after a stint of over six years guiding the bank’s monetary policy.
Will we see any change to monetary policy?
The past fortnight has seen huge volatility in the market expectations of a rate cut. Coming a month after the UK general election on 12 December, we have seen significant volatility around each economic reading released throughout recent weeks. Initial signs of a November and December weakness came via declines in retail sales (-0.6%), monthly gross domestic product (GDP) at -0.3%, and industrial production (-1.2%) data. With inflation also falling back (1.3%), there was plenty of reasoning behind the flurry of dovish comments that came our way from the likes of Carney and monetary policy committee (MPC) members Michael Saunders, Silvana Tenreyro and Gertjan Vlieghe. Adding those names to the already dovish Jonathan Haskel, there is a strong chance we will see the MPC cut rates on Thursday.
However, the past week has seen that dovish message undermined somewhat, with the provisional January purchasing managers index (PMI) surveys showing a huge jump in the services sector. If confirmed, that rise would see services grow at the fastest rate in 16 months. This highlights a likely economic recovery that could take shape over the coming months. However, with a coronavirus curveball now raising the possibility of a China-focused shock to the global growth picture, we are seeing expectations of a rate cut increase once again. This takes us back into a position where there is a market majority for a cut, with options markets pricing in a 52% chance that Carney will lead a cut at his final farewell.
What should we look out for?
After a long period of stability, the recent election and Brexit agreement has helped free up the BoE to take action if they see it as being necessary. This is a genuine coin-toss meeting, with the 52% market expectation of a rate cut highlighting that we are almost guaranteed volatility on the day. It is worthwhile noting that at 0.75%, the headline interest rate is unlikely to fall much further beyond the 25 basis-point move that many are calling for. Thus, there is a strong chance we will see a ‘hawkish cut’ which sees the bank provide commentary that paves the way for a less dovish stance going forward.
This meeting also sees the release of the quarterly monetary policy report, or inflation report. This provides forecasts for both growth and inflation, which adds yet another dimension for traders to keep their eye on. Given the potential coronavirus implications on growth and energy prices, there is plenty for the committee to consider. Not to mention the phase one trade deal between the US and China.
Where now for the pound?
GBP/USD has been on the slide in the lead up to this meeting, with fears over a potential rate cut clearly impacting confidence despite recent gains. However, this brings us back into a provisional support trendline, following a break below trendline and Fibonacci support. Ultimately, we need to see a break below $1.2962 to bring about a more bearish outlook for this pair. Until then, there is a strong chance that we will see the bulls come back into play as the pair seeks to build on the recent intraday trend of higher highs and higher lows.
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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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