Investors split ahead of Bank of England rate decision
High level of uncertainty over whether bank will cut rates in Mark Carney’s swansong
Investors are facing one of the most uncertain Bank of England rate decisions in years, with markets split over whether policymakers will cut interest rates for the first time since 2016.
The nine members of the monetary policy committee must judge whether the economy has enjoyed a strong enough post-election bounce to justify keeping rates on hold, or whether continued Brexit uncertainty amid a period of weak growth justifies decisive action now.
“The Bank of England is the most interesting of the central banks in the G7 right now,” said Fabrice Montagne, chief UK economist at Barclays. “Unlike the other G7 economies, the UK is facing fundamental challenges and choices that could have a variety long lasting effects on the economy.”
Traders see Mark Carney’s last policy meeting as a cliffhanger, and are pricing in a 45 per cent chance of a cut to 0.5 per cent, prices in swaps markets showed as of Wednesday afternoon.
Market expectations have been on a wild ride: they rose from as little as 0.5 per cent at the start of January to as high as 70 per cent, before cooling in recent days.
“It is rare for market pricing to be so equivocal,” said economists at Goldman Sachs, who think the decision is “hanging in the balance”.
Dovish comments from several rate-setters set off the expectations, and while recent economic data — including labour figures and PMI surveys — have shown signs of improvement there has yet to be a definitive swing in either direction.
“Some degree of post-election bounce is evident and in our view it might be prudent to see more data before acting as soon as January,” said HSBC’s chief European economist Simon Wells. The bank expects a cut in May, rather than January.
In contrast, Deutsche Bank is expecting a move this week thanks to entrenched uncertainty over the UK’s future relations with the EU and the fact UK growth has been below potential for the past two years.
“Ultimately, we expect the MPC to favour a risk management approach to monetary policy, pulling the trigger on a January rate cut,” the bank’s UK economists wrote in a note to clients, noting that evidence of a post-election “Boris bounce” has been mixed.
Mr Carney could choose to ease pressure on his successor Andrew Bailey by pushing for a cut now, said Mr Montagne of Barclays, who noted that falling oil prices could weigh on inflation and create a fresh headache for the bank.
“Against that backdrop, a rate cut in January would clearly make it easier for incoming governor Bailey to ease into office. Mario Draghi set a precedent recently at the ECB by cutting just before handing over to Christine Lagarde,” he said.
The previous rate changes under Mr Carney had all been priced in, leaving an unusual level of uncertainty over this week’s decision, said Mike Riddell, head of UK fixed income at Allianz Global Investors.
“We believe the market has moved too aggressively to price in UK rate cuts, and anticipate the BoE will hold steady,” he said.