GBP Higher Ahead of Super Thursday

The end of the week is shaping up to be big for financial markets as the race between the Federal Reserve and Bank of England to raise interest rates first hots up. Thursday’s BoE monetary policy decision, minutes, inflation report and press conference should clear a lot up in terms of where the UK’s central bank stands on the interest rate outlook, inflation and the economy.

There’s also plenty of economic data being released on Thursday including manufacturing figures from the UK, labour market data from the US and employment data from Australia.

Bank of England vs Federal Reserve

For a long time, the Fed looked a shoe in to be the first major central bank to lift rates from record low levels. The economy was improving, unemployment was close to what the Fed deems “full employment” and consumer confidence was back at the levels seen before the financial crisis. The only thing that was lacking was spending and inflation which has prevented the Fed raising until now.

The UK has been experiencing many of the same problems as the US and core inflation is actually currently lower. Even if you take the Fed’s preferred measure of inflation – the core personal consumption expenditure price index – which is currently 1.3%, rather than the core CPI number at 1.8%, inflation is still above the UK’s meagre 0.8%.

Why would the MPC consider raising rates?

The difference is that the UK consumer is spending, not splurging but enough to sustainably drive economic growth. While the sustainability of the spending has been questioned in the past, it is now being supported by strong wage growth which last month hit 3.2%. This should support future wage and price growth even if we see similar subdued wage growth in the manufacturing sector as we’re seeing in the US as manufacturers try to remain competitive with their foreign peers. Low oil prices may also weigh on overall inflation but the additional disposable income that they offer should still support spending and core inflation, which is what the BoE tracks.

With all this in mind, the message from BoE policy makers is becoming increasingly important and that message has become far more hawkish recently. Only a few months ago, in the last inflation report, we were led to believe that the first rate hike is likely around the middle of next year.

Already since then, a number of policy makers have suggested this could come earlier. Governor Mark Carney hinted last month that it could come later this year, claiming that the decision was likely to come into “sharper relief” by the “turn of this year”.

What can we expect on Thursday?

It will be interesting to see on Thursday what exactly the BoEs view on the economy is now and whether an interest rate hike is still on the cards this year. Wage growth has improved since the last report which is also likely to influence their outlook for inflation.

The central bank will also announce its latest monetary policy decision on Thursday and for the first time, this will include the minutes from the meeting and the votes on interest rates and asset purchases.

For the first time this year, we’re expecting a couple of monetary policy committee members to vote in favour of a rate hike. Martin Weale and Ian McCafferty have voted for a hike in the past, most recently in December last year before inflation fell to a point that it made them less confident that it would return to target. Two votes isn’t hugely significant if Weale and McCafferty are named as those who voted in favour but it does represent a shift back towards tightening and if they are joined by any other policy makers, the market impact could be significant.

What else should we look out for Super Thursday?

There are also a number of key data points that will be monitored closely on Thursday. UK manufacturing production is likely to have remained subdued in June as they continue to suffer as a result of the strong pound which makes them less competitive against their foreign peers.

We’ll also get the first indication of UK GDP for the current quarter as NIESR releases its GDP estimate for the three months to the end of July.

We’ll also get some data from the US, with weekly jobless claims figures and mortgage delinquencies for the previous quarter being released.

In Australia, we’ll get the latest update on employment, which is expected to rise by 15,000 with the unemployment rate remaining at 6%. While Australia continues to face difficulties as a result of tumbling commodity prices, unemployment has been falling this year and the Reserve Bank of Australia seems fairly comfortable with the way things are, hence the decision to leave rates unchanged. The chances are that more job losses will follow the commodity rout which could bring further rate cuts but for now, the labour market appears to be showing some resilience.

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