Bank of England Says Wait And See


Thursday’s Bank of England update is also not expected to produce any immediate changes in policy. Keeping Bank Rate at a record low of 0.10% is likely to be a relatively straightforward decision for the Monetary Policy Committee (MPC) . However, there w ill probably be much more debate over the QE programme. Recent speeches from external member Michael Saunders and Deputy Governor Dave Ramsden have signalled some concern about the ongoing rise in inflation and the risk of it staying above target over the next 2-3 years. So at least one, and possibly both, may vote to curtail the current £150bn tranche of asset purchases. Updated economic projections in the Monetary Policy Report are indeed likely to show a much higher peak in inflation relative to the May forecasts, with CPI inflation likely to be seen rising w ell above the 3% mark later this year. How ever, as it w ill probably still be assumed that the rise is ‘transitory’, the medium-term projections are likely to be little changed with inflation seen easing back down to be at, or close to, the 2% target in 2 and 3 years’ time. That should justify the majority of members remaining in w ait-and-see mode and supporting the completion of the asset programme. In fact, countering the relatively ‘hawkish’ comments from Saunders and Ramsden, several other MPC members, including Deputy Governor Ben Broadbent and the soon-to-be departing Gertjan Vlieghe, have cautioned against an early tightening in policy. For those members, the need for a more cautious approach reflects a number of uncertainties that continue to weigh on the outlook, including the recent pick-up in Covid cases, ongoing disruptions to global supply chains and the extent to which mismatches in the labour market persist.


While that suggests a tightening in policy remains some way off, it is nevertheless possible that the BoE will provide some guidance on what such a move will eventually look like. The recent huge expansion in the BoE’s balance sheet has left previous forward guidance, that QE will not be rundown until interest rates had reached at least 1.5%, looking somewhat outdated. Earlier this year, the MPC asked Bank staff to consider an appropriate new strategy and recent criticism from a House of Lords committee may have lent the review more urgency. So the MPC may now take the opportunity provided by next week’s press conference to give some new guidance on the ‘sequencing’ of future changes in policy. If they do so just how much detail will be provided remains highly uncertain. How ever, as Governor Bailey has criticised the existing guidance for being too prescriptive, it is feasible that there could be a shift to a more flexible framework. That might allow the MPC to move between higher rates and balance sheet unwinding and to be able to use the latter at a much earlier stage of the tightening process than under existing guidance.


The monthly US employment report will as usual command a lot of attention from markets. In his press conference this week, Fed Chair Pow ell noted that a further fall in unemployment would be pivotal in helping determine w hen they would start to phase out their asset purchases. He also noted the present unusual combination of a high level of job vacancies - suggesting strong demand for workers - alongside continued elevated unemployment. That makes the numbers particularly difficult to interpret right now . We expect the July report to show a monthly jobs rise of 950k which would be the largest since last August and we also expect the unemployment rate to fall to 5.6% from 5.9%. Both moves would highlight the buoyancy of the labour market. The wage data w ill be watched for any evidence they are being boosted by recruitment difficulties. We look for a 0.4% monthly increase. Also of interest in the US will be the ISM manufacturing and services reports. Both were still at elevated levels in June that would normally signal strong growth. However, both also slipped by more than expected compared to May. Elsewhere, including in the UK, the data calendar is light. The July Lloyds Business Barometer will be released early Monday and is likely to show business confidence still elevated. The July PMI manufacturing and services measures are second readings, although the July construction PMI (Thu) is new data. That is expected to post a modest pullback from a 24-year high in June.

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