Bank of England meets today for first time since interest rate cut

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15 September 2016

Matthew Ryan

Senior Market Analyst at Ebury. Providing expert currency analysis so small and mid-sized businesses can effectively navigate international markets.

The Bank of England (BoE) will announce its monetary policy decision this afternoon for the first time since interest rates were cut to a fresh record low 0.25%. UK policymakers are now overwhelmingly expected to refrain from injecting further stimulus into the economy.

T
he MPC will announce its interest rate decision and release the minutes of its meeting at midday UK time today, with policymakers likely to stress the need to wait for further economic data before deciding on the next monetary policy move.

We think the BoE will acknowledge the recent improvement in economic data, particularly the latest PMI figures for August, all of which rebounded from the multi-year lows post-Brexit vote. However, the minutes of the meeting are likely to hint that a further interest rate cut or quantitative easing expansion remain on the cards this year should economic conditions take a turn for the worse.

Data out of the UK’s labour market yesterday continued to suggest that the Bank of England would be right in keeping a fairly loose monetary policy stance. Britain’s unemployment rate remained unchanged at 4.9%, although earnings growth, both including and excluding bonuses, slowed more than expected in the three months to July (Figure 1).

Figure 1: UK Average Earnings Growth (2010 – 2016)

Meanwhile, the US Dollar eased against its major peers on Wednesday, with investors instead piling into the Japanese Yen. There is growing scepticism that the Bank of Japan could fail to deliver at its highly anticipated meeting next week.

The Euro also rose to its highest level so far this week, brushing aside a weak set of industrial production figures.

Today will be an especially busy day, with major announcements likely to cause volatility in the currency markets. Inflation data out of the Eurozone this morning and retail sales in the US this afternoon will be the main data points to look out for.

Major currencies in detail:

GBP

Sterling touched a fresh two week low against the US Dollar yesterday, ending the session 0.2% lower.

Yesterday’s UK labour report was on the whole fairly disappointing. The jobless rate remained unchanged, albeit increasing by 39,000 in real terms. Wage growth was less impressive, slowing to 2.1% excluding bonuses in July from 2.3% in June. This could potentially signal tougher times ahead for UK households, who now face the prospect of rising inflation in the coming months following the sharp post-Brexit fall in the Pound.

The Bank of England will be the highlight for Sterling today. Retail sales figures this morning are expected to slow and could also receive some attention.

EUR

Despite another soft set of economic data the Euro edged 0.25% higher against the US Dollar on Wednesday.

Industrial production figures yesterday morning amplified concerns about an economic slowdown in the Eurozone. Output fell 1.1% in July in a sign that the economy is unlikely to quickly regain momentum following a disappointing performance in the second quarter. On an annualised basis, production fell 0.5%, the largest decline in the measure since late-2013.

We think the recent string of underwhelming news out of the Eurozone heaps further pressure on the European Central Bank to announce an extension in its QE programme later in the year, at the very least.

Headline inflation out of the Eurozone is expected to remain unchanged when released this morning.

USD

The US Dollar lost steam yesterday as risk appetites recovered and expectations for a September interest rate hike by the Federal Reserve continued to dwindle. The Dollar index ended London trading 0.2% lower.

The price of imported goods into the US fell in August according to the US Labor department yesterday, with the import price index remaining deep in negative territory at -2.2%. The decrease was, however, the smallest since October 2014, suggesting that the price of overseas goods are beginning to stabilise as the strength of the US Dollar fades.

Retail sales at 13:30 UK time will be the focus in the US today. Consensus is at -0.1%, with any negative surprises likely to further dampen expectations for a rate hike by the Fed when it meets next week.

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