What to expect from Bank of England’s meeting?
2/1/2017
The BoE is due to release its rate decision, minutes and inflation report at 14:00 MT time, followed by Carney’s press conference.
Key things to watch
Growth
After the Brexit vote, pessimistic BoE’s senior officials had to slash their GDP forecast for the UK. But as everybody knows, time is a great healer; the British economy showed colossal resilience and dissipated the bank’s fears of looming economic slowdown. So, at the November meeting, the BoE had to revise its forecast for the gross domestic growth for 2017 to 1.4% from 0.8%. The subsequent economic data didn’t disappoint policy makers’ expectations. The latest reading of the UK GDP has held better. In fact, it overshot BoE estimates of 0.4%, rising by 0.6% instead. This will probably encourage the BoE to upgrade its forecasts once again at the upcoming meeting.
Inflation
The first reaction to the Brexit vote was a plunge in sterling’s exchange rate that pushed the UK inflation rate to 1.6% (two-year high). At the November meeting, the BoE guessed for 2.7% inflation rate in 2017. Since then oil prices spiked 8% which may push the bank to lift its last forecast for inflation to 2.8% for 2017. But the bigger upticks in inflation rates are unlikely. The recent appreciation of the pound slightly clipped the wings of inflation.
Interest rate
Strong economic growth and rising inflation rates usually lead to the rise in inflation rates. But super cautious BoE will likely shy away from raising rates expecting grievous, devastating consequences for the UK economy after Brexit. The UK’s separation with the EU is likely to hit business activity and slow consumer spending.
The recent rise in sterling, however, offered the BoE a greater room for manoeuvre. Now, the bank can raise interest rates without hurting employment. We must note that this was a major concern of rate-setters in November.
Overall, the strong economic data and stronger GBP should increase the chances the BoE will change its current neutral-to-dovish stance to just neutral or even to neutral-hawkish one. This will certainly push the pound higher in short-term.
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