Thursday, January 30th: Policy Decision & MPR release: 12:00 GMT; Press conference 12:30 GMT

Current Policy: Bank Rate: 0.75%; Asset Purchase Programme: £435bn; Corp Bond Purchases: up to £10bn

In Brief:

• Analysts divided whether BoE cuts 25bp or leaves unch (approx 2/3 expect unch, 1/3 expect a cut)
• Market is pricing 56% chance of a Jan cut and 33bp cuts by year end
• No change in QE expected
• Dovish comments from Tenreyro & Vleighe triggered the market pricing increased chance of a cut
• Jan is the last meeting chaired by Carney before Andrew Bailey becomes Governor
• Large uncertainty on the balance of the rates vote; will likely not be unanimous
• New quarterly MPR expected: prior 2yr CPI forecast was 2.03% with 3yr at 2.25%
• BoE should issue a statement on reinvestment of £17.4bn for the APF due to maturing holdings

Overview:

There is great uncertainty ahead of this meeting with market analysts and economists divided over whether the BoE will cut by 25bp or leave rates unchanged. Differences in opinion within the investment community is dependent on whether the MPC members will focus on the downward trend in inflation or the recent bounce higher in PMIs. Other positives includes the strong conservative majority in the December election plus the completion of the Brexit Deal. Clouding the picture is the fact that the January meeting represents the last one chaired by Mark Carney before he is replaced by Andrew Bailey, and the global demand risk posed by the Novel Coronavirus. Although of limited focus in most Bank BoE previews, it is also important to remember a new UK budget will be presented in March for which fiscal easing has been promised by the ruling Conservatives.

On the dovish side, some banks view a Bank of England 25bp cut as a form of insurance policy against a potential sharp slowdown in the economy. Some even mention that unless the BoE cuts now in January, economic data may have bounced higher by the time the next meeting takes place in March and therefore a rate cut would no longer be possible. Other institutions have even more dovish expectations, seeing the current slow growth/inflation period as more permanent and a total of two 25bp rate cuts this year as the likely scenario. One of these institutions expects two rates cuts even if the MPC does not pull the trigger at the January meeting.

On the hawkish side, some institutions believe in a bounce higher in the economy now that both the December election and a Brexit deal has been reached. The MPC should, and will therefore, simply have a wait-and-see approach until more economic data is available before considering cutting rates. The most bullish institution even sees the need for the MPC to raise rates from the present level by the end of 2020.

With so much uncertainty in the actual decision to cut rates or not, expectations for the balance of votes is spread even more diversely. Some banks who believe rates will be left unchanged think a repeat of the 7-2 vote in December is on the cards with both Haskel and Saunders voting for a 25bp rate cut. Recent dovish comments by Vlieghe and Tenreyro could bring the vote to 6-3 or 5-4. For others who believe in a 25 bp rate cut, expectations are for at least 2 members to vote against a cut. Not one believes unanimity is likely, no matter what the outcome of the decision.

Adding to the uncertainty is of course the release of the new UK Budget by Sajid Javid on March 11^th with expectations for the announcement of fiscal loosening. This in theory should support a bounce higher in the economy beginning in the second quarter.

Another important element at the BoE meeting will be a statement related with the reinvestment of the maturing UKT4.75 3/20 of which the BoE has a nominal holding of £15.99bn (actual amount to be reinvested is £17.4bn). Expectations are for the BoE to announce APF (Asset Purchase Facility) operations commencing the week of March 9^th with reinvestment taking place over a total of 5 weeks. Expectations are for the re-investments to follow a similar pattern to previously with the announcement each Thursday at 16:00 for auctions to be held during the following week. Purchases then taking place by the same residual maturity buckets as seen in prior reinvestment operations:

Monday       : Between 3 and 7 years

Tuesday       : Greater than 15 years

Wednesday : Between 7 and 15 years.

December Decision Statement and Minutes:

The MPC’s December’s decision statement and Minutes left all policy unchanged but the vote was 7-2 vote on interest rates with both Haskel and Saunders looking for a 25bps cut at the December 19^th meeting.

On Brexit, as highlighted in their November Monetary Policy Report, their assumption is for an orderly transition to a deep free trade agreement between the United Kingdom and the European Union.

“The Committee’s latest projections for activity and inflation were set out in the November Monetary Policy Report and were based on the assumption of an orderly transition to a deep free trade agreement between the United Kingdom and the European Union..”

Once the uncertainty of Brexit has been removed, they expected a pick-up in business activity at the beginning of 2020 plus some fiscal policy easing by the government.

“UK GDP growth was projected to pick up from current below-potential rates, supported by the reduction of Brexit-related uncertainties, an easing of fiscal policy and a modest recovery in global growth. With demand growth outstripping the subdued pace of supply growth, excess demand and domestic inflationary pressures were expected to build gradually. CPI inflation was projected to rise to slightly above the 2% target towards the end of the forecast period.” 

The MPC’s November Monetary Policy Report can be found using the following link: MPR

November MPR Forecasts Summary:

Source: MPR, BoE

Annual Average GDP growth rate projection:




November MPR had seen a significant revision lower in GDP relative to August MPR report. As highlighted in the November report expectations are for GDP to in bounce higher to 1.64 in 2021 and 1.86 in 2022.

Annual Average CPI Inflation projection:



Looking at the CPI inflation projections based on market rates, the August CPI inflation projections had been for 2yrs at 2.23% & 3 years at 2.37%. In November these figures had been reduced to 2.03 and 2.25. The January MPR report will be scrutinised closely to see if we see a continuation in the downward trend of inflation.