UK: Time for the BoE to take charge of GBP – ING

While the Bank of England is widely expected to keep policy unchanged today, analysts at ING are looking for two signals that could mark a positive turning point in GBP sentiment and end the 'Great British Sell-off' in currency markets.

Key Quotes

“September BoE preview: Our 5 Key Messages

1. Greater risks of a 6-3 MPC vote split and a third member joining the dissenting ranks this week (likely Chief Economist Andy Haldane); in this scenario, we would expect the odds of a November BoE rate hike to increase to 50:50

2. Expect BoE to signal explicit concerns over the UK rate curve being too flat, the intent being to realign the currently benign market expectations with the narrative of a gradual tightening path over a 2-year horizon

3. Inflationary pressures from renewed GBP weakness may, for some MPC members, tilt the growth-inflation policy trade-off in favour of an earlier than anticipated reversal of the post-Brexit emergency monetary stimulus

4. The combination of more robust UK inflation signals in the latest round of CPI and labour market data releases - as well as a hawkish tilt at the September BoE meeting - could mark a positive turning point in GBP sentiment

5. We are now starting to see the risk premium related overshoot in EUR/GBP unwind; a hawkish hold at this week's BoE meeting could fuel a further correction towards - and potentially below - the 0.90 level, which would almost certainly shelve any EUR/GBP 'parity' fears for now.”

“Signal 1: Market implied policy rate curve is too flat

We believe that BoE officials may use the policy statement, accompanying minutes and vote split this week to try and shake up market expectations for the path of policy. Based on the UK OIS curve, implied market pricing suggests that there is a barely 1 in 4 chance of a 25bp Bank rate increase this year, which rises to only a 65% probability by the end of 2018. Likewise, surveys of households and businesses suggest that few anticipate meaningful increases in interest rates anytime soon.

While policymakers may be less concerned about the repricing of immediate rate hike expectations, what may be making some on the MPC nervous is the flattening bias over the 2-3 year part of the curve. This is indeed starting to look at odds with an economy where inflation is set to rise close to 3% and economic growth remains positive, if somewhat subdued.”

“Engineering a steeper UK rate curve

The minutes of the August MPC meeting stated that if the economy followed a path similar to the one the BoE anticipated “then monetary policy could need to be tightened by a somewhat greater extent… than the path implied by the yield curve”. This sentiment has been repeated in several subsequent BoE speeches and is likely to remain within the accompanying text.

However, while this message may provide a backstop to any further flattening of the UK rate curve, we suspect that any meaningful uplift in short-term rates is unlikely to be achieved unless there is a hawkish shift in the vote split.”

“We feel that the economic uncertainty brought about by Brexit will likely lead the MPC to hold fire until there is much greater clarity in the UK's post-Brexit investment environment - which may not transpire until the turn of the year. Moreover, even if we do see last August’s emergency rate cut reversed at some point over the next six to twelve months, our message would be that it is unlikely to mark the start of a pronounced tightening cycle.”