How Will BoE Respond to Latest UK Developments?

BoE Adds Hung Parliament to List of Economic Uncertainties Days Before Brexit Talks Begin

The Bank of England announces its latest monetary policy decision on Thursday at a time of significant uncertainty for the country. A hung parliament in, what was, an entirely unnecessary snap election was the worst preparation for Brexit negotiations which are due to begin next week.

BoE policy makers will meet on Thursday to discuss another possible problem facing the country during all of this, rising inflation. In fact, rising prices are largely linked to the above problems, with the UKs vote to leave the EU a year ago triggering the substantial depreciation in the pound that drove up the cost of goods from abroad.

Policy makers must now determine whether the factors that drove inflation well beyond its 2% target are just temporary or represent a longer term challenge for price stability. With headline inflation at 2.9% in May and core inflation slightly lower at 2.6%, the decision for the central bank is not as straightforward as it would like during what is already a complicated time for the country.

Especially when growth is already slowing and the consumer – a hugely important part of the economy – is feeling the pinch.

Real Wage Growth vs Retail Sales

Source – Thomson Reuters Eikon

Policy makers have already previously indicated that they will only tolerate a little more upside on growth or inflation before voting for tighter policy which should technically make a hike a possibility on Thursday and yet, under the circumstances I think this is extremely unlikely. Any form of tightening would catch markets completely off-guard and could therefore generate quite a reaction, although again, this seems very unlikely.

What Can We Expect on Thursday?

The voting on both interest rates and asset purchases is expected to remain unchanged from the last meeting with only one policy maker of the eight – Kristin Forbes – voting for a hike. Forbes will leave her role on the Monetary Policy Committee at the end of the month leaving little support, it would seem, for any policy tightening.

With this in mind, it will be interesting to see how the BoE balances higher inflation with managing expectations, particularly in the absence of a press conference which we only get every three months alongside the inflation report.

All eyes will be on the minutes and the voting and should the central bank give the impression that tighter policy is a real possibility in the months ahead, it will be interesting to see how much the pound rises – if at all – given all of the uncertainty weighing it down. Typically, currencies appreciate in response to an event that is typically more hawkish than anticipated.

The FTSE would also likely be sensitive to any changes in policy stance or outlook, with its negative correlation with sterling also likely impacting its moves in the aftermath of such an outcome.

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