Analysts largely expect the BOE to be one of the first of the major central banks to raise rates. That said, there is a considerable debate among them about whether it will be at this meeting or at the next.
The decision comes fast on the heels of the Fed’s anticipated start of its taper. This suggests it would be an opportune moment for the BOE to move as well. However, less than auspicious data recently points to the BOE potentially wanting to wait just a little bit longer.
As for where the money markets are, there is a virtual tie in expectations. This means that regardless of what happens, the pound is likely to move.
Naturally, a hike of 25 basis points would imply a move higher, while keeping rates unchanged will likely cause the pound to weaken. What will probably determine this analysis is the breakdown of the votes.
Mixed signals
Part of the confusion can be due to the latest comments from the MPC members.
On the one hand, Governor Bayley has been insisting for a while now that rates need to rise. But, he hasn’t given a date, and this isn’t the first time. On the other hand, noted dove Tenreyro was the last to speak ahead of the meeting, suggesting that it’s too soon for a hike.
The consensus, then, is that either way, there will be a split in the votes.
Where that split lies could be determinant about what will happen in the coming meetings. There seems to be a minor coalescing around the idea that the BOE will vote to keep rates steady but it will be a narrow margin.
Overall, this could virtually guarantee a rate hike at the next meeting. This would be the outcome that would least affect the pound, presumably. But this could also generate some swings in the market in the immediate aftermath of the meeting. That’s because typically there is a few seconds to a few minutes delay between when we hear about the decision, and when we get the vote split.
What to consider
There is also a minor probability that the BOE will “split the difference” and just raise by 10 basis points. That is very unlikely, but it could confuse the market which is banking on either a hold or a 25 point raise.
The MPC is composed of two hawks and three doves, so the question is where are the four “centrists” going to turn.
If the centrists split evenly, which is the most likely scenario by a very small margin, then the vote would be 5:4 to hold rates. On the other hand, if the centrists vote with the doves, it would be 7:2. And this would likely be very dovish.
Essentially, that would mean that Bailey, for all of his talk of the need to raise rates, actually isn’t voting for it.
What if they pull the trigger?
It’s possible that three centrists vote to raise, in a 5:4 split in favor. This would be a “dovish hike”, and would shift market focus to when we can expect the next hike.
Generally, should the MPC vote to raise rates, the expectation is that Bailey will try to convey a dovish tone at the presser later, and emphasize that the next move will be in quite some time. This might somewhat dampen the initial move.
In the final days before the meeting, some analysts are cautioning that the market might be getting ahead of the bank on the issue. They point to some of the expectations of a rate hike being based on the RBNZ, which recently pulled the trigger.
Nonetheless, the UK is not facing the same housing situation the Kiwis are. Additionally, the BOE has a little more margin than many traders are giving it credit for.
Wednesday, 03 Nov, 2021 / 1:15
