Policy decision: BoE likely to be much more cautious

The BoE's policy decision this week raises two key questions: what will they say about the risks from China and how will the vote evolve? Before Monday's UK PMI services drop the BoE was not expected to make big changes to their message, highlighting risks from abroad, but strong domestic data. That PMI services drop to 53.3 from 55.6 will, however, inject more caution into the BoE's language. The main risk now is that we get a much more dovish message and/or vote than last month. 

That said, on balance, another 8-1 vote is expected to keep rates on hold. One PMI does not change the outlook on its own, particularly as that reading is an outlier relative to other indicators. Momentum in the housing market contrasts oddly with the sharp downturn in the services PMI. On the whole domestic demand indicators remain strong. So to react immediately to one bad reading could give the impression of very serious worries at the BoE.

But the risks are plain, with BoE Chief Economist Andy Haldane a key focus. He recently gave a speech suggesting again that rate cuts were possible. The PMI could give him a reason to insert into the minutes of the BoE's meeting his view that the UK may need to resort to rate cuts. He is not expected to vote for a cut yet though for the reasons above. To put it more plainly, responding to one PMI number could be a hostage to fortune: it could bounce up next month given the puzzling nature of the fall this month. 

Another outside risk is Ian McCafferty, who has been calling for rate hikes in the past two meetings. He may be considering how wise that position is given the latest data. He is not expected to have changed position yet. Next month would be a more likely point for a change from one or other of those rate setters. It gives time for another PMI reading to confirm or deny the fall in September. And next month's BoE meeting coincides with the publication of a new November Quarterly Inflation Report forecast.