BOE monetary policy preview

The pound has remained buoyant despite the domestic political trouble, riding on speculation that higher inflation would force the Bank of England (BoE) to increase interest rates, a materially weak dollar, better than expected unemployment report and a preliminary agreement on 21 months Brexit transition deal between the European Union and the United Kingdom. According to latest reports, Inflation in February was 2.7 percent, while core inflation reached 2.4 percent. Both numbers were down 0.3 percent compared to January. On the other hand, the economy is still suffering from political uncertainties of a minority government, which is leading Brexit negotiation, one of the most complex in history.  Amid these uncertainties, BoE is scheduled to announce interest rate decision at 12:00 GMT.

• Monetary policy is one of the two major directional and volatility risks for the pound with the other being Brexit.

BOE policy and expectation –

• After the referendum last year, the Bank of England (BoE) reduced rates by 25 basis points, introduced additional asset purchases of £60 billion, introduced £10 billion worth of corporate securities purchase, and £100 billion worth of targeted lending scheme, all to be funded via balance sheet expansion.

• With the UK economy performing much better than expected, the Bank of England (BoE) governor Mark Carney is likely to keep the ammunition dry for future firing. In 2017, with the economy doing better than anticipated the BoE hiked rates by 25 bps.

• It is highly possible that the central bank would signal another rate hike with inflation hovering close to 3 percent, pushing down real wages.

Impact –

• With speculation rising over higher interest rates, today’s decision would add major volatility in the pound based pairs. If the rate is hiked again, the pound is likely to shoot higher, if not, the market would lead a temporary drop in the pound with focus on numbers of hawks at MPC. If the number increase, it would prove positive for the pound.
• Moreover, the focus for the pound is on the upcoming Brexit negotiations as well as on the uncertainties surrounding the current operating structure of the government, so, without any major change, it is likely to turn out as a non-event.

The pound is currently trading at 1.416 against the dollar.