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Bank of England (BoE): The MPC convenes next week with its full complement of nine members for the first time since March. With no significant changes to the economic picture compared to last month, it is unlikely that there will be any changes in the policy stance either.
However, at least one member is expected to maintain their call for higher interest rates. In a speech last week, Michael Saunders noted that “inflation has risen well above target, while spare capacity in the economy has been absorbed faster than expected” and the tradeoff between growth concerns and higher inflation is “beyond my limits of tolerance.”
That said, one of the surprising elements of the Q2 GDP release was the weakness of household consumption growth, with non-retail activity contracting for the first time since 2014. This reflects the inability of households to continue running down savings to fund spending in the wake of the squeeze on incomes. This, in turn, poses clear downside risks to the growth outlook which is likely to prompt the MPC to hold fire.
Moreover, with inflation not far from its expected peak the case for policy tightening on inflation grounds appears limited, especially since wage growth has not responded. Accordingly, we suspect that Saunders’ interest rate views will remain in a minority for some time to come. GBP is the worst performing major currency in the past month (the GBP NEER fell by nearly 3%) but last week, Sterling's bull run has been intensified as the market flipped the BoE from the vanguard to the rearguard of expected central bank policy normalization.
Swiss National Bank (SNB): At its monetary meeting on 14 September, the SNB is likely to come to a somewhat more positive view of the inflation outlook. The core rate rose further in July, to 0.4%, from -0.4% at the end of 2016. The latest depreciation of the Swiss franc is likely to increase the underlying inflationary pressure even further in the medium-term.
In early August, EURCHF was trading at 1.15, its highest level since the end of the minimum exchange rate in early 2015. Against this backdrop, the SNB is likely to revise its inflation forecasts to the upside.
The 4.5% slide in CHF vs EUR between late July and early August was dramatic and unexpected. This was the fourth largest fall on record and unique in that it was not preceded by a sharp appreciation in the franc. We do raise our forecasts for EURCHF again this month, but this is essentially a mark-to-market exercise and to mechanistically account for the more bullish profile for EURUSD. EURCHF is forecasted at 1.13 and 1.15 by end of 2017 and Sep’2018, while USD CHF at 0.94 and 0.92 by the end of 2017 and Sep’2018 respectively.
