Since last week’s hawkish surprise from the Federal Reserve, markets have been focused on central banks tightening monetary policy. There has been a re-assessment of the Fed’s policy outlook, and now turning to the Bank of England, will there be something similar? We believe this is at least one meeting too early for the Bank of England to move formally down the tightening path.
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With no economic forecasts and risk of the Delta variant unknown, this is not the right meeting
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However, dissenting voices are building and could be the key factor
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The market expects the Bank of England to increase interest rates in 2022, sooner than the BoE is currently guiding
Expecting a quiet monetary policy meeting in June
The June meeting of the Bank of England’s Monetary Policy Committee (MPC) not expected to cause too much of a stir. This is for several reasons:
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There are no economic projections due – the next Quarterly Inflation Report is in August. This is when the revisions to economic forecasts will next be seen.
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In May, the BoE slowed its pace of weekly asset purchases for the period between May and August by £1bn per week (although the total target stock of purchases remains the same. The BoE is only halfway through this period, so do not expect any further changes.
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The Delta variant of COVID has increased infection rates and the UK Government have delayed the full re-opening of the economy. This gives reason for the BoE to err on the side of caution.
Dissenting voices appear to be growing on the MPC
The consensus view of the MPC is to maintain the current policy stance. However, there was a dissenter on the committee a the last meeting. Chief Economist, Andy Haldane, wanted the total stock of asset purchases to be reduced by £50bn.
Although he is expected to dissent again, this is Haldane’s last meeting before he steps down from the MPC. The key question is whether the committee’s arch-hawk can persuade any other dissenters in his last meeting.
Perhaps more surprising (and certainly another potential dissenter) was the recent hawkish speech by Gertjan Vlieghe, who talked up the potential for a rate hike in 2022. Vlieghe is typically one of the more dovish members of the MPC. Could this be the start of a shift in opinion amongst the MPC members?
Any increase in the dissenting voters would be the key surprise from this meeting.
Market expectations are for rate hikes to start in 2022
Markets were rocked by the Fed last week, but we do not expect anything similar from the Bank of England this week. The BoE does not provide such a detailed breakdown of interest rate projections as the Fed. In the May meeting, the BoE was guiding for a +15 basis point hike by Q2 2023 (up from +0.10% to get interest rates back on the quarter point track) and then the first real move of +25bps by Q2 2024.
However, markets are pricing for UK interest rates to be raised decisively in 2022. Looking at Short Sterling Interest Rates (the market’s expectation of UK rates), the market is pricing rates to be at +0.25% in Q1 2022. There is also another move of a quarter per cent higher at +0.50% by the end of 2022 and one more priced in for the end of 2023 to leave rates at +0.75%.
With the absence of economic projections in this meeting, the MPC is unlikely to change much. Therefore, we believe it is too early for the Bank to cause much of a stir in this meeting. However, we will certainly be on watch for August, which will be very much a live meeting for shifts in the outlook for rates.
Conclusion
Traders will be looking for hints that the Bank of England is moving down the road towards tightening monetary policy. We believe the June meeting is unlikely to be the moment. Market reaction could therefore be fairly muted to this meeting.
