Throughout last week, the view of analysts was that the PMIs published on Friday would be decisive as to whether the BOE cut rates during its first meeting of the year.
But, in the end, the data split the difference and just increased uncertainty. Yes, the important manufacturing PMI was above expectations, but it was still technically in contraction.
Governor Carney has been hinting quite strongly that further easing was in the cards, despite the City urging them not to take action.
The latest data has been mixed, both monthly and quarterly. And it’s not terribly surprising given the General Election in early December that could distort the data a bit.
However, given the circumstances, the balance of expectations shows a pretty even split between those who expect a hold and those who expect a cut.
The Markets Don’t Like Uncertainty
Without a consensus as to what to expect from the BOE, the markets have not been able to price in the expectations. That means we could see a reaction no matter how it goes.
Generally, a cut in rates would be seen as negative for the pound, while a hold would be positive. However, the upside could be limited, as keeping rates on hold simply kicks the can down the road to February.
A cut has a more permanent effect, since virtually no analyst is expecting the reference rate to go below 0.5%.
With the swirling geopolitical risks around the world, the pound has traded largely flat. This is likely due to traders waiting for some direction from the BOE.
It’s a somewhat unique situation where there is such an even balance on expectations ahead of a central bank meeting. We could have some volatility in the immediate aftermath of the release.
It should be noted that this time, there is a press conference for Governor Carney scheduled for after the meeting. Normally, this would be a strong sign of potential policy changes.
However, this time around, as it’s the end of the quarter, the BOE will be issuing a Monetary Policy Report which routinely is followed by a press conference.
Regardless of what happens at the meeting, there are some factors to keep in mind to gauge the market’s potential reaction. First is the issue of the vote. Last time it was 7-2 in favor of maintaining policy.
Should policy be maintained, but at a different margin of votes, the market could react to the hawkish or dovish shift in the vote.
Similarly, if there is a vote to cut, a 5-4 or even 6-3 vote would show little conviction towards easing by the bank. It would also lead to a market reaction of a “hawkish cut”.
It could even cause an immediate drop in sterling, followed by a longer-term move higher. More unanimity in the vote conveys more determination by the BOE. And it would likely cause a cleaner move in the market.
The other factor to keep in mind is the annual outlook and tone of the policy statement. Low rates for an extended period of time is the theme, cut or no. A change in that language could also rile up the markets.