Bank of England time!

A bit of a changing of the guard going on. Haldane was the only voter to cut QE at the last meeting and he’s now gone. This is Vlieghe’s last meeting so it doesn’t really matter what his view are but just for reference, he’s for keeping policy as is for the coming quarters. The new girl, Mann commented that the BOE should not be premature in tightening policy, and struck a very cautious tone overall towards jobs and inflation, so goes into the the dove box. Ramsden and Saunders seem to have picked up Haldane’s baton in stepping towards slowing stimulus. However, their latest comments (Mid-July) were still of the ‘might be near to slowing QE’ rhetoric, rather than ‘BOE should reduce’ like Haldane. Either way, these two are the ones expected to possibly move to voting for QE to be reduced, so on the QE front, expectations are that we could see a 6-2 vote to keep QE as is (2 for reducing).

It’s also worth noting that BOE QE is different to others as it’s not open ended. It’s due to be completed end of the year to reach the £895bn (875 bonds, 20 corp) target. The BOE is buying at 3.4bn a week to fulfil that target. What’s to be noted is that it’s a reducing window for the BOE to then taper QE. We’ve maybe 21-22 weeks to go, so that’s around 75bn left to be done, and the most that could be tapered. In numbers terms, cutting the rest of QE by maybe 20-50bn isn’t exactly a big deal. It’s not like the Fed cutting by 20bn per month for 6 months. I don’t think a cut to QE (or whether it remains as is until the end) is the big news story but we’ll let the market decide on that.

Really, the big news will be how they view the inflation forecast. At the last Mon Pol report, they were still expecting it to be below 2% into Q2/Q3, and obviously we’re above there now. But, like everyone else, they acknowledged that prices might run higher for a while. The question will be how “transitory” they feel now. Because BOE QE is winding down anyway end of the year, this does really push the interest rate topic closer than other major CB’s. The BOE will be done with QE start of 2022, while other CB’s are still pumping so rates are going to be the next expectation game. Those expectations are creeping further up the 2022 calendar from 2023.

It would be a shock if anyone changed their rate vote, so we should expect 8-0 in favour of keeping rates unchanged. Now one quirk/risk that might be possible is that because the MPC is down a member the algos read an 8-0 vote as being a vote change from 9-0. It’s at the back of my mind that we’ve seen a similar wonky move when in this situation some years ago but I can’t recall it exactly. It might have been in the days of McCafferty and Co. It might amount to nothing but stranger things have happened. (Update) On doing some digging, it was Aug 2017 when we last had 8 members but I can’t find anything that notes prices acting funny on that one so it could be something that happened before then. It’s probably a tiny risk but if the algo’s aren’t ready for it, we could see some wonky price action. As I say though, low risk but be aware.

Overall, a shift towards a taper might be taken as a bullish tilt and thus GBP jumps but it will be the message on inflation (and the economy in general) that will be the main driver. I think we’re going to get the usual caution, as the BOE is in the same boat as the Fed regading seeing what happens when jobs support ends in Sep. The worker shortage is wide spread, especially in services (hospitality etc), so rising wages will be a worry for its inflationary pressure. I’m expecting maybe a bit of a can kick meeting, with things evenly balanced on the hopeful/cautious scale. Looking at GBP, Cable likely respects the 1.37/1.40 range on the wide but with risk of a 1.40 headline pop if there’s hawkish news. EURGBP has two way risk around 0.8500, as that’s where we’re sitting as I type this. If the news is dovish (or non-hawkish), we could see swift run up to near 0.8600.

Ryan Littlestone

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