BOE PREVIEW: Brexit May Keep MPC United But Risk of Split Seen
(Bloomberg) -- Most analysts say the MPC will vote unanimously to hold monetary policy as the Brexit referendum looms, though weakening growth could spur one member to vote for a rate cut as soon as this month, according to BofAML.
- MPC may prefer to stay as neutral as possible even as it continues to forecast an inflation overshoot, amid a reluctance to be seen as political and uncertainty over the impact of a June 23 vote on EU membership; hence, decision could spur muted market reaction
- Others say that given weak April PMIs, 2Q growth could be as low as zero, compared with the BOE’s 0.5% estimates; central bank may trim its forecasts
- NOTE: BOE rate decision, minutes and Inflation Report due Thursday at 12pm U.K. time; press conference scheduled to start 30 minutes later
- BofAML (analysts including Robert Wood and Kamal Sharma)
- Expect BOE to vote 8-1 to hold policy, with Gertjan Vlieghe preferring a rate cut, though is a close call; pushes back forecast for BOE rate increase to May 2017 from Nov. 2016
- See asymmetric risks to GBP from decision this week; any constructive tone from BOE unlikely to boost the currency or rate expectations, given EU referendum is nearing
- Expects BOE to marginally lower inflation forecast at the two-year horizon to 2.0% from 2.1%
- BOE will probably indicate Brexit referendum could materially change policy outlook
- Unlikely to provide fully worked-out alternative scenarios for both a “Remain” and “Leave” vote, which will make forecasts trickier to interpret
- Goldman Sachs (Andrew Benito)
- Expecting a 9-0 vote
- Near-term inflation forecast nudged higher, the 2Y forecast to remain similar to February’s levels; 2016 growth est. to edge lower with the MPC largely discounting recent weakness
- Expect little in the way of forward guidance given the exceptionally flat forward curve and the increased divergence in MPC views
- Barclays (Andrzej Szczepaniak, Francois Cabau)
- Policy stance is likely to be unchanged, as is the split of the vote; Vlieghe is unlikely to vote for a cut before EU referendum, although can’t be ruled out
- MPC likely to continue to look through EU referendum uncertainties
- May cut domestic growth forecasts; inflation forecasts will probably still predict CPI to overshoot of the central bank’s 2.0% target by the end of the forecast horizon, anchoring expectations of a rate rise within that period
- Scotiabank (Alan Clarke)
- BOE monetary policy seen taking a backseat as final phase of EU referendum campaign gets underway
- Expects consensus committee vote to keep bank rate unchanged at the meeting, although at least one vote of dissent possible
- Inflation projection crucial; BOE medium-term inflation should remain unchanged given weaker GBP, higher oil prices and delayed expectations for a rate increase compared to February
- Medium-term inflation projection most likely in the 2.1%-2.15% y/y range; unlikely to support the case for voting for a rate cut at this stage
- JPMorgan (Malcolm Barr, Allan Monks)
- Expect a mixed tone, with the MPC expressing increased uncertainty and caution over the near-term outlook
- MPC’s baseline forecast will be conditioned on a vote to remain in June, i.e. the government’s official position
- BOE will therefore assume some growth rebound in 2H 2016 and make a more modest downgrade to 2016 growth forecast than otherwise, to 2.0% from 2.2%
- MPC won’t want to overreact to a soft patch in data, which could well prove transitory; likely to say the “underlying” health of the economy is hard to read at present
- BOE will again show its 2- and 3-yr ahead inflation profile is above 2%, conditioned on market expectations of a policy rate increase not happening until 2019
- RBS (Ross Walker, Simon Peck)
- EU referendum reduces the likelihood of a market-driving update
- MPC likely to be highly non-committal and markets will probably be cautious in their interpretation
- Expects unanimous vote, reiteration of Feb. view that an increase is more likely to be the next move rather than a cut
- Expects 3Y CPI projection to be lifted to 2.35% vs 2.25%, signaling market is too dovish; 2016 GDP to be trimmed by as much as 0.2pp
- Any commentary on MPC’s assessment of economic implications of any vote to leave the EU and its policy reaction function will be eyed, though policy makers will be cautious of wading too far into politics
- HSBC (Simon Wells, Liz Martins)
- Expect dull forecasts, which won’t rattle markets ahead of the EU referendum, with inflation slightly higher in the near term and growth projected to be nudged down in 2016, 2017
- Suggests policy and the voting pattern won’t change in May
- Expect 2Y ahead inflation forecast to rise to 1.94% and 3Y to 2.29%
- Can’t avoid discussing Brexit risks, though expect a central forecast that assumes U.K. votes to stay in the EU; may give indicative forecasts under an alternative, post-referendum scenario; unlikely central bank will issue two sets of forecasts
- Credit Suisse (analysts including Peter Foley)
- BOE is out of play until the referendum is over and is likely to be in policy hibernation; expect unanimous vote to keep rates unchanged at 0.5%
- Inflation forecasts to exceed the 2% target by the end of the forecast horizon under current interest-rate expectations
- With market now pricing no rate rise until 2019, the BOE is likely to note that market has priced an increase out too far
- Higher oil, weaker currency and lower front-end rates may mean inflation at the end of the forecast horizon may be slightly higher compared with February
- Expect near-term growth profile to be revised down
- Nomura (Philip Rush)
- Expect MPC to forecast inflation at only slightly above 2% in 2 years time, consistent with past behavior, even though market rate pricing reflects Brexit risk
- Market may heavily discount MPC’s guidance; biased to see dovish risks to market reaction on QIR day, which would anyway be normal
- BOE must assume the U.K. votes to stay in the EU, in line with government policy, in its forecasts
- UBS (John Wraith, David Tinsley)
- MPC probably won’t retain its slightly hawkish message given rates markets are already pricing a delay in rate increases
- Few weeks before the referendum isn’t the best time to be outspoken; some likely to show concern about slowdown in data
- MPC members will keep themselves as invisible as possible in the campaign process; they don’t want to become a bargaining tool
- Questions could become louder around possible monetary policy easing if growth slows more markedly going forward
- Rabobank (Jane Foley)
- Uncertainty over June 23 referendum outcome creates difficulties for BOE staff on economic projections for the next year or so
- Political uncertainty likely to have already had some impact on business confidence, difficult to isolate the impact from the effects of sluggish global growth
- Pace of expansion likely to be slower than estimated in Feb. report
- Slower growth adds to the risk BOE will delay its first rate increase of the cycle
- BOE likely to maintain cautious position on policy even if the June referendum returns a “Remain” result
- Investec (Chris Hare)
- MPC in wait-and-see mode as it rides out the communications challenges of the EU referendum; will continue to signal markets are too dovish, possibly through an inflation forecast that is a touch stronger than in February
- Conditional on a “Remain” vote in the referendum, Hare expects growth to recover and for inflationary pressures to start building notably over 2H 2016
- Hare will be digging beneath the Brexit-related headlines to confirm view BOE will lift rates in November
Alert:
HALISTER1Source: BFW (Bloomberg First Word)
People Alan Clarke (Bank of Nova Scotia/The)
Allan Monks (JP Morgan Chase)
Andrew Benito (Goldman Sachs International)
Andrzej Szczepaniak (Barclays PLC)
Chris Hare (Investec Bank PLC)
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