Lee Sue Ann [email protected] Global Economics & Markets Research Email: [email protected] URL: www.uob.com.sg/research Wednesday, 01 November 2017 Flash Notes BoE Preview: A Dovish Rate Hike The Bank of England (BoE) will announce its latest policy decision on Thursday (2 November) at 8pm SGT. The Inflation Report will be released at the same time, and then at 8.30pm SGT, BoE Governor Mark Carney will give a press conference. A Potentially Historic Super Thursday We expect the BoE Monetary Policy Committee (MPC) to raise the Bank Rate by 25bps from 0.25% to 0.50%. If it materializes, this would be the first rate rise in 124 months, and doing so would bring to an end the longest period without a British rate increase for 66 years. We had previously expected no rate rises until at least after Brexit. But the key paragraph in the Monetary Policy Summary and minutes of the Monetary Policy Committee meeting ending on 13 September 2017 that prompted us to change our view following the 14 September meeting was: All MPC members continue to judge that, if the economy follows a path broadly consistent with the August Inflation Report central projection, then monetary policy could need to be tightened by a somewhat greater extent over the forecast period than current market expectations. A majority of MPC members judge that, if the economy continues to follow a path consistent with the prospect of a continued erosion of slack and a gradual rise in underlying inflationary pressure then, with the further lessening in the trade-off that this would imply, some withdrawal of monetary stimulus is likely to be appropriate over the coming months in order to return inflation sustainably to target. All members agree that any prospective increases in Bank Rate would be expected to be at a gradual pace and to a limited extent. Votes Will Drive Market Expectations Mark Carney Ben Broadbent Governor Gertjan Vlieghe Deputy Governor External (Monetary Policy) Jon Cunliffe Deputy Governor Andy Haldane (Financial Stability) Chief Economist Dave Ramsden Deputy Governor Michael Saunders (Markets & Banking) External A LOOK AT THE Silvana Tenreyro Ian McCafferty External (new) DOVES AND HAWKS External AT THE BOE Source: The Guardian, Telegraph, UOB Global Economics & Markets Research Flash Notes Wednesday, 01 November 2017 1 Page Votes Will Drive Market Expectations Nonetheless, not all members on the rate-setting panel are convinced that tightening policy is currently a good idea. That leaves us with the questions: who will be in the majority, and how narrow is the split? On this, Michael Saunders and Ian McCafferty’s hawkish views, favouring higher rates, are well known and so it is probably safe to say these two are quite likely to vote for a hike. Gertjan Vlieghe, who has historically opposed a tightening of policy, dropped his opposition in September and suggested he might back a rate rise too. Mark Carney has also indicated and provided hints that the Bank was ready to raise rates soon. Following Andy Haldane’s speech in Bradford (June) and in comments ahead of the BoE’s 20th Anniversary Conference (September), we believe he is as well. Meanwhile, of the four other members left, we are quite sure Dave Ramsden will be one of the dissenters. In his testimony at the Treasury Select Committee (TSC) earlier this month, he had said he was not part of the majority of BoE policymakers who believe a rate hike is likely to be needed “in the coming months” because he saw little sign of inflation pressure building in Britain’s labor market. Jon Cunliffe, in a recent BBC interview, also expressed concerns about the lack of sustained inflation pressure. With Ben Broadbent and Silvana Tenreyo, either or both could vote for a hike. We assume that as an internal member of the MPC, Broadbent could go with the majority; whilst Silvana Tenreyro seemed to us more likely than not to call for no change in policy in November. Whilst the vote could therefore be anything from 5-4 to 7-2; price action in the GBP will crucially depend on this vote outcome. The smaller the majority, the higher are expectations likely to be that this is a “once and done” rate rise. On the other hand, a higher majority is likely to increase expectations of another rate rise next year. We are looking for a 6-3 vote in favour for a hike, with Jon Cunliffe, Dave Ramsden and Silvana Tenreyo as the dissenters. Consensus forecasts are also for a 6-3 vote in favour for a hike. Hence, a 5-4 vote would be deemed as more dovish and could send the GBP lower to retest the 1.30-level, whilst a 7-2 vote could trigger a fresh rally, driving GBP back above 1.34. In addition to the rate decision, the Bank’s quarterly inflation report should also shed some light on future policy. Carney has said he expects inflation to rise further in the coming months above September’s 3.0% level.A sharp upward revision to the inflation outlook would fuel expectations of further policy tightening in the coming months. The growth forecasts will also be watched closely following the surprise beat of 3Q GDP growth. The Policy Dilemma Nonetheless, in more ways than one, Thursday’s rate increase would be an unusual one. With Brexit hanging and the UK economy weak, the BoE is not seeking to quell price pressures generated by strengthening growth. Rather, it is trying to slow inflation driven above its target by the weakening GBP and the slide in the economy’s long-term trend. This is why we are skeptical of this being the start of a monetary tightening cycle. Disclaimer: This analysis is based on information available to the public. Although the information contained herein is believed to be reliable, UOB Group makes no representation as to the accuracy or completeness. Also, opinions and predictions contained herein reflect our opinion as of date of the analysis and are subject to change without notice. UOB Group may have positions in, and may effect transactions in, currencies and financial products mentioned herein. Prior to entering into any proposed transaction, without reliance upon UOB Group or its affiliates, the reader should determine, the economic risks and merits, as well as the legal, tax and accounting characterizations and consequences, of the transaction and that the reader is able to assume these risks. This document and its contents are proprietary information and products of UOB Group and may not be reproduced or otherwise. Singapore Company Reg No. 193500026Z SUPPORTING THE HAWKS SUPPORTING THE DOVES UK GDP UK Wage Rises Lag Behind Inflation Source: Macrobond, UOB Global Economics & Markets Research Source: Macrobond, UOB Global Economics & Markets Research GDP rose by 0.4% in July-September, ahead of expectations. It’s Wage growth in the UK remains sluggish, and fails to keep pace an increase on the 0.3% growth recorded in the first two quarter with inflation. Average earnings increased by 2.2% in the three of 2017, but still a fairly moderate performance. months to August. UK CPI UK PMIs Source: Macrobond, UOB Global Economics & Markets Research Source: Macrobond, UOB Global Economics & Markets Research CPI inflation came in at 3.0% in September, above the 2.8% y/y The PMIs are fairly subdued. September’s prints were softer – the BoE had penciled in back in August. The August reading was manufacturing print at 55.9; services print at 53.6; construction also 0.2ppts above its estimate. print dipped below 50 at 48.1. UK Unemployment Rate UK Consumer and Business Sentiment Source: Macrobond, UOB Global Economics & Markets Research Source: Macrobond, UOB Global Economics & Markets Research The jobless rate has fallen further to 4.3%, the lowest reading in Sentiment data in the UK for October remains mixed. 42 years. Initially led by part-timers and the self-employed, the growth has broadened to include full time employees. Flash Notes Wednesday, 01 November 2017 3 Page.