BOE monetary policy preview

The pound has remained buoyant despite domestic political trouble and Brexit setbacks, riding on speculation that higher inflation would force the Bank of England (BoE) to increase interest rates and a materially weak dollar. According to latest reports, Inflation in November reached 3.1 percent, while core inflation reached 2.7 percent. 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 risk for the pound the other being Brexit.

BOE policy and expectation –

• After the referendum last year, the Bank of England (BoE) has 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 addition to that, the central bank has indicated that the next move in monetary policy could be on either side of the spectrum given the recent sharp rise in domestic inflation.

• In the last monetary policy, BoE hiked interest rates by 25 basis points.

• It is highly possible that the central bank would signal another rate hike with inflation reaching 3.1 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. In a recent breakthrough, the European Parliament has voted in favor of moving the talks to the next phase as Britain has reached an agreement with the Commission over divorce bill.

The pound is currently trading at 1.344 against the dollar.