SUPER THURSDAY: What to expect from the Bank of England later today

LONDON — It’s “Super Thursday.”

At 12.00 p.m. BST (7.00 a.m. ET) the Bank of England will announce its latest interest rate decisions, and crucially, present its quarterly Inflation Report — the three-monthly update of its forecasts for the British economy.

It is widely expected that there won’t be any change to the Bank’s monetary policy, with interest rates set to stay at a record low of 0.25%, and the bank’s QE programmes capped at £435 billion.

However, macroeconomic forecasts for both inflation, and wider growth are both likely to see significant changes, with numerous economists speculating that the Old Lady of Threadneedle Street could push up its inflation forecast from a peak of 2.8% to somewhere around 3%.

That’s down to inflation’s surge in recent months, linked to the plummeting value of the pound since Britain voted to leave the EU last summer. Falling sterling has pushed up the price of importing goods, passing through to everyday items that regular Brits buy. This is now showing up in official inflation data, which at the latest reading sat at 2.3%, a joint-high not seen since early 2014.

A hawkish shift?

While rates are expected to stay the same, what could happen is another member of the Monetary Policy Committee voting for a hike. At its last meeting only one member of the nine-person committee — arch-hawk Kristin Forbes — voted to raise rates, but she could be joined by Ian McCafferty, who has voted for hikes in the past.

That shift will be driven by the trade-off between rising inflation and broader growth. The BoE is mandated to keep inflation as close to 2% as it can, so recent overshoots are a concern for policymakers. Raising rates would help keep a cap on inflation, but also remove support for the economy’s growth.

The BoE has already said that certain MPC members other than Forbes are ready to hike, saying in the minutes of its last meeting: “Some members noted that it would take relatively little further upside news on the prospects for activity or inflation for them to consider that a more immediate reduction in policy support might be warranted.”

However, after the ONS’ Q1 GDP numbers came in under expectations, analysts at Barclays argued that the MPC members thinking of a hike will likely be forced to reconsider.

“The UK has only now begun to feel the beginning of the post-referendum slowdown,” Andrzej Szczepaniak of Barclays wrote at the end of April.

“Given the ascent of headline CPI (which we expect to peak at 3.1% y/y in June and August), the increasing likelihood of negative real wage growth in the coming months, the likely tightening of unsecured consumer credit over the coming quarters (which has of late supported resilience in household consumption), as well as the lowest savings ratio since records began, we expect that UK GDP growth will continue to decelerate over the course of 2017 as households are forced to tighten their belts.”

“All in all, we believe this strengthens our view that the Bank of England MPC will leave its monetary policy stance unchanged over our forecast horizon (until end 2018).”

No move until 2019

Interest rates will remain on hold until Britain has formally left the European Union, comments this week from a senior figure at respected research house, the National Institute of Economic and Social Research (NIESR) suggest.

“We assume that interest rates remain unchanged until we exit the European Union,” Simon Kirby, NIESR’s head of macroeconomic modelling and forecasting told reporters earlier this week, according to Bloomberg.

“If the chance of a transitional deal does begin to materialise, it might well be that the Bank of England brings forward the point at which it raises interest rates, but at the moment, that doesn’t appear to be on the cards.”

It is worth noting that only eight members sat at the MPC’s meeting this week following the resignation of Deputy Governor Charlotte Hogg in March.

As with all inflation reports, BoE Governor Mark Carney will answer questions following its release and could be quizzed on issues away from the bank’s macro forecasting and monetary policy decisions. Likely topics include the resignation of Hogg after she failed to report a possible conflict of interest, as well as the lack of gender diversity in senior roles at the bank.

The BoE currently has just one female MPC member, Kristin Forbes, who will leave her role in the summer.

Carney will also — almost certainly — be asked about Brexit, given that Thursday’s announcement is the first MPC decision since Britain triggered Article 50 at the end of March.

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