‘Firmly challenged’: Markets are ready to call the Bank of England’s bluff

Mark Carney

Bank of England Monetary Policy Committee set to leave rates and QE unchanged.
Rhetoric from the central bank is set to take a hawkish tilt and warn on rate rises.
Thursday will be a test of the Bank of England’s credibility, with markets sceptical that the MPC has room to increase interest rates.

LONDON — The Bank of England faces a test of its credibility, and market reaction its monetary policy announcement on Thursday will indicate just how seriously investors take take the central bank.

Policy is almost guaranteed to remain unchanged, with interest rates at a record-low 0.25% and the bank’s bond-buying programme capped at a maximum of £435 billion overall.

What is expected to change, however, is the tone taken by the central bank, as it tries to prepare the markets, and the wider British public, for the possibility of interest rate hikes in the near future as the key policy trade-off the bank has to address shifts direction.

At its simplest level, the policy dilemma facing Britain’s central bank is that it must balance surging inflation brought on by the weakened pound since the referendum, with the slowdown in the economy, dwindling consumer spending and declining inward investment.

So far, the weak economy has largely held sway on the MPC, with the closest vote held since the Brexit seeing three members of the committee backing an increase in rates back to 0.5%, and five voting to leave rates unchanged.

But inflation is running at 2.9% – almost an entire percentage point above the bank’s government mandated target – and wage growth failing to keep up with the rising price of goods, so talk of an interest hike to squash inflation is growing.

“We believe that BoE officials may use the policy statement, accompanying minutes and vote split this week to try and shake up market expectations for the path of policy,” ING FX strategist Viraj Patel wrote this week.

A hike is very unlikely happen this month, but it could happen a lot sooner than the end of 2018, where market expectations currently sit.

“Based on the UK OIS curve, implied market pricing suggests that there is a barely one in four chance of a 25bp Bank rate increase this year, which rises to only a 65% probability by the end of 2018,” Patel adds.

The bank is trying to prepare the markets for an interest hike sooner than currently expected, but the markets are simply …read more

Source:: Business Insider

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