Bank of England binge watching the Bank s next move

Thursday 6^th August is now being called Super Thursday, when the Bank of England will announce its latest interest rate decision, release the minutes of last week’s meeting and release the third Inflation Report of the year all at midday UK time. The bank actually decided on its interest rate decision last week, but the announcement was delayed to allow time for the minutes to be written up and released at the same time as the Inflation Report.

Why the data dump?

This is a new way of doing business for the BoE, and is part of Governor Mark Carney’s plans to make the bank’s decision-making process more transparent. It also brings the BOE in line with the Federal Reserve, ECB and BOJ who all hold press conferences after the release of their interest rate decisions.

Some have argued that the data dump will confuse the public and could cause excess volatility in the market, especially since it will have to digest not only the latest interest rate decision, but also the latest medium-term GDP and CPI forecasts from the Bank along with the nuances of the minutes. However, in reality the market has not been too confused with the change in communications from the Fed, which now releases its economic forecasts along with FOMC members’ expectations for future interest rates.

While the BoE has not gone to the same lengths as the Fed to adopt transparency and it will not release anything like the Fed’s interest rate expectations, or “dot plot” chart, this is a huge step for the BoE and could make the next policy steps from the Bank easier to predict.

Why is this important?

The ultimate aim of this shift at the BoE is to prepare the market for changes in the UK’s monetary policy without causing excess market volatility. The Bank wants the market to price in its next move in moderate steps without causing major swings in asset prices, and panic in the market. This is more important now than ever, due to the long hiatus between rate hikes, potentially 8 years. Rates are at historic lows and have been kept on hold for an unprecedented amount of time. Now that the economy is back on its feet and wages are rising, the Bank needs to come up with a strategy for hiking rates and getting the market comfortable with any change to borrowing costs in the coming months.

From a trading and market perspective, the data dump is important since a change in interest rates could have major implications for UK asset prices. By releasing this information to the public in one go rather than drip feeding information on a sporadic basis, the market has a greater chance of being able to make up its mind about what it expects from future BoE policy decisions, rather than chopping and changing direction based on a conflicting and unpredictable information schedule from the Bank.

What to look out for on Super Thursday:

If the Bank were hawkish then we would expect:

• Were there any dissenters? The market will be interested to see if any MPC members decide to vote for a rate hike. Last year David Miles and Ian McCafferty both voted to raise interest rates, before reversing their decision on the back of plunging inflation. Now signs that wage pressure is rising these two members are the most likely to vote for a rate hike this week.
• The minutes could also highlight that other members are getting ready to hike rates, which could see a majority vote for a rate hike before the end of this year.
• Will the bank revise up its GDP forecast for this year after the increase in the pace of growth in Q2?
• Will the BoE revise up its long term inflation forecast, could the Bank’s latest predictions see CPI rising above the key 2% threshold in the next 2 years?
• Will Carney say that a rate could happen sooner than the turn of the year?

A dovish or neutral BoE:

• No dissenters and no sign that any MPC members will vote for a rate hike in the near term.
• Small upward revision to GDP forecasts.
• No change to CPI forecasts, especially long term forecasts.
• Carney keeps an open-mind on the timing of a rate hike.

The market reaction:

On balance we think that a more hawkish outcome from Super Thursday is more likely than a dovish or neutral outcome, which could trigger a market readjustment after midday UK time on Thursday.

The most at-risk asset classes include the pound and Gilts. Some potential market outcomes from a hawkish Super Thursday include:

• A move higher in Sonia rates. They are currently pricing in one rate hike from the BoE by February next year, this could be brought forward to the end of this year.
• If this happens then we would expect a raise in Gilt yields across the curve, especially in 2 and 5-year Gilts.
• It could also trigger a move higher in sterling, back towards 1.60 in GBPUSD, especially if the market thinks that the BoE could follow the lead of the Fed and potentially hike rates this year.
• EURGBP may see an extension of its move below 0.70 after Wednesday’s sharp fall in the single currency.
• The pound is likely to gain broadly in the event of a hawkish BoE, in our view.
• A rise in interest rates could be good news for banking stocks as it may increase revenue opportunities from lending activities, which may cancel out the amount the banks have to pay in extra interest for savers.
• If the FTSE 100’s banking sector is boosted by Super Thursday then this could be good news for the entire index.

As you can see, if you trade UK assets then Super Thursday is one not to miss.

Takeaway:

• Super Thursday is the first time the BOE will announce its rate decision, release meeting minutes and deliver the penultimate Inflation Report of the year all at the same time.
• Mark Carney’s press conference is also pivotal to try and determine the timing of any rate hike.
• See above for the most important things to dig out of this data dump from the BoE.
• We believe that a hawkish BoE is the most likely outcome on Thursday.
• This could cause widespread GBP strength and a shift in UK interest rate expectations.
• GBPUSD may test the key 1.60 level if Carney and co. at the Bank are hawkish, whether or nor cable can extend gains above this key level could be dependent on the outcome of the US payrolls report released on Friday.