BoE Preview: MPC to hold fire and adopt a less dovish tenor

The Bank of England will conclude its November monetary policy meeting on Thursday by 12:00 GMT. We expect the meeting to end in the decisions to maintain the official Bank Rate at 0.25 percent and keep the programme of asset purchases paused at 435 billion British pounds for Gilts and at 10 billion British pounds for corporate bonds.

The tenor of the minutes and the accompanying inflation report will probably spark more of a response – perhaps a slightly positive, but fleeting, one from GBP. What would be of keener interest will be the nature of the BoE’s updated long-term growth and inflation projections in the inflation report, the last one for this year, which we expect to show a perceptible upward revision to the future path for inflation over the next 2-3 years and indeed slight upward adjustments to the GDP projections for the same time period, compared what was published in August.

The key driver of the upward revisions to growth will likely be the higher starting point that would be used, considering that the economy has not weakened as much as the BoE previously feared.

Indeed preliminary output based third-quarter GDP exceeded all expectations by slowing just to a pretty respectable 0.5 percent q/q after 0.7 percent in the second quarter of 2016, and against the BoE’s prediction of 0.3 percent q/q, having revised that up from 0.1 percent. On an annual basis, it jumped 2.3 percent y/y, from previous 2.2 percent y/y.

Moreover, the decline in British pounds has been so dramatic that it is now 21.1 percent down from its high point of 94.0 at the close of November 18, 2015 and a few tenths of a percentage point away from its 73.7 nadir of December 30 2008, that the market is beginning to get more worried about the UK’s inflation outlook.

“We postpone the BoE interest rate cut from November to May-17, and expect GBP to continue to reverse some of the recent weakness in the short term. On the longer horizon, however, we expect to see GBP weakness to continue,” said DNB in its research note.

This is in conjunction with the feeling that the economy is not about to tip into recession after all. CPI inflation has climbed back up to its 1 percent lower limit after languishing below it for 22 months, and is expected to continue its ascent in the coming months. So, a pause in monetary policy is now expected for at least the next several months.