BOE October Rate Decision Preview

WHEN

Thursday 10th October at 12:00BST (07:00ET)

CURRENT CLIMATE

The BoE is expected to leave monetary policy unchanged at their October policy meeting on Thursday, maintaining its record low interest rate at 0.50% and its asset purchase facility at £375bln.

This meeting comes amid a deluge of positive data from the UK, suggesting that the nascent recovery in the economy is gaining momentum. As Rabobank strategist Jane Foley points out “the better tone in UK economic data suggests a continuance of the voting pattern of September, in which there was no support for additional QE, is likely to be repeated.”

Howard Archer of IHS gives credence to this perspective, “there seems not the remotest chance that the Bank of England’s Monetary Policy Committee (MPC) will change any aspect of monetary policy at their October meeting, the already limited likelihood of any further quantitative easing appears to have waned further as the good news on the UK economy has largely kept on coming.”

The positive outlook on the UK economy was reinforced by the IMF’s latest forecasts, which upped UK growth expectations to 1.4% this year, up from its previous forecast of 0.9%. It also added that UK GDP was set to expand by 1.9% in 2014, rather than by the 1.5% it previously forecast. “This is a marked contrast to the general pattern of IMF forecast downgrades” noted Citi economist Michael Saunders.

However, the UK economy is not completely out of the woods yet, highlighted by Wednesday’s weak factory data for August, something that alludes to the fragility of the UK recovery. Jens Larsen, chief European economist at RBC Capital Markets, says “industrial production numbers remind us that the UK recovery will be an uneven affair.”

FORWARD GUIDANCE REBUFF

Recently, markets had been pushing back against new BoE governor Mark Carney’s dovish forward guidance. Markets had seemingly decided the forward guidance was unconvincing against a backdrop of strong economic data and priced in a rise in interest rates during 2015, in contrast to the BoE’s own guidance, which is looking for rates to rise in 2016.

The Bank previously outlined its new forward guidance during the Quarterly Inflation Report in August. The main condition was that rates would not rise until unemployment fell to 7%, and was supplemented by a number of knockout conditions. Specifically the CPI inflation rate must remain below 2.5% in the short term and inflation expectations must remain well anchored.

Archer argues that “any change in interest rates is clearly a long way off, whether or not unemployment ends up falling more rapidly than the Bank of England currently expects.”

Some investors were concerned that the BoE could turn more hawkish, based on inflation levels which has seen CPI inflation stay at or above 2.5% on 41 occasions in the last 44 months. However, recent inflation data has been more encouraging with CPI falling back to 2.7% in August – oil prices have fallen from high’s as concerns over Syria retreat and sterling strength observed in recent months should help contain inflation.

We saw plenty of discussion from September’s MPC meeting regarding the drivers behind the push higher in UK market rates, but since then money market rates have lacked the conviction they previously had and the pressure on the MPC to explain their policy position has eased. Therefore, it is unlikely this months’ meeting will yield any new commentary regarding the BoE’s tactics.

OTHER THEMES

Also colouring discussions could be the risks of any potential downside from the on-going political turmoil in the US. Though this will likely be a subject of ancillary discussion and is unlikely to feature prominently, short of the bank highlighting possible risks and jumping on the bandwagon of prominent global figures urging the US to get their act together.

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