BoE preview: will the MPC set us up for a Q3 rate rise?

With the Bank of England due to make their latest rate decision this week, the focus is likely to be more on the tone rather than whether we will see any shift in rates.

Source: Bloomberg

The Bank of England (BoE) looks set to keep steady this week, with the Monetary Policy Committee (MPC) presiding over what is likely to be somewhat of a predictable rate decision. However, while there is little doubt that the committee will retain the current level of monetary accommodation, this meeting remains a significant gauge for markets to assess when it will be seeking to raise rates once again.

The first quarter (Q1) saw the BoE disregard much of the weak data due to weather related issues, which saw the construction sector in particular dragging gross domestic product (GDP) growth lower. However, Q2 has been somewhat mixed in terms of data, with a decline in average earnings one of the chief concerns. Inflation is always going to be one of the key drivers of monetary policy, and with UK consumer price index (CPI) declining 0.7% over the past six months, many believe that the BoE are going to be increasingly hesitant to start looking to raise rates. That being said, CPI remains well above the 2% target, and with the influence of rising crude prices yet to be felt, there is reason to believe that the committee will look past the current trajectory of UK CPI.

Bank of England meeting

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Elsewhere, we have seen improvements to a number of the most notable data points as the month’s progress. Rising services, manufacturing, and construction purchasing manager index (PMI) surveys in May have helped iron over weakness in manufacturing production. While weaker data earlier in the year forced the MPC from delaying a widely expected rate rise in May, we now turn towards August as the next meeting which markets could see them act again. The question on investor's minds are whether we will see a hawkish tone struck this time around, with the pound likely to be in the spotlight.

GBP/USD has clearly been on the decline of late, with the pair heading into the $1.3204 support zone once more. A break below there would likely spark another downward move for the pair, following a breakdown last week. Keep an eye out for any shift in tone from the BoE, with further downside looking likely unless we break back above $1.3472.

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