Bank of England Preview: Rates unchanged on a slip vote - Rabobank

Analysts from Rabobank expect the Bank of England to leave rates unchanged next week on a split vote. They don’t expect a dovish tone. 

Key Quotes: 

“The odds of a rate hike have vanished, but next week’s meeting hasn’t lost its importance. The inflation report and the Governor’s press conference will be crucial in setting up market expectations for an August rate hike.”

“We expect the MPC to acknowledge the disappointments from the first quarter, by marking to market their forecasts downwards. We therefore expect to see a downward revision to growth for 2018 from 1.8% to probably 1.5%, but with the emphasis that this mostly reflects first quarter weakness.“

“We don’t expect any significant changes to the outlook for 2019 and 2020.”

“The market hasn’t made up its mind yet, but is tending towards the first explanation. The flattening in the OIS curve has therefore been far less dramatic than the price changes in the May contract suggest. The MPC-dated forward OIS’s show that the market is still pricing for one rate hike in 2018, already in August (62%) or in November (90%), and then another one over the course of 2019. These expectations are important for the Bank, as sterling found some support in the prospect of rate increases. If these prospects of future hikes were to be wiped out entirely, which could be the case if the data continue to disappoint, sentiment around sterling is set to sour. Given that previous sell-offs of sterling led to higher inflation and lower real incomes, it is therefore vital for the Bank of England to keep the expectations of future policy moves alive. We consequently don’t expect them to strike a dovish tone at next week’s meeting.”

“We expect them to keep rates unchanged in a split vote, but with a touch of hawkishness to keep the prospects for future rate increases alive. If it is serious about its forward guidance, we expect them to grab the first opportunity that presents itself. We now believe that this will be in August, but this remains conditional on a pick-up in activity. If the market interprets Carney’s comments as we do, forward OIS pricing should also be increasingly sensitive to changes in the data, instead of the “They will hike in May anyway”-complacency we’ve seen previously.”