The BOE to Meet Before GDP Data Comes Out
There is a chance that the upcoming BOE meeting might cause some shake-up in the markets. That’s because there are several different courses that the central bank could take in terms of guiding where rates will be. And the market seems to be a bit disconcerted about which of the options to get ready for. Meaning that no matter what happens, someone will have to adjust and that likely will push the price of the pound.
That having been said, the expectations around the Fed have had a heavier hand in the GBPUSD lately as investors look to find yields and hide from inflation. The UK saw inflation come down slightly slower than expected, but it now boasts a headline rate that is below that of the US. Which means the real interest rate gap is turning in favor of the pound even if the BOE looks to start easing. That could potentially temper the market reaction to more dovishness out of Threadneedle Street.
What’s Expected to Happen
There is a unanimous consensus that there won’t be an actual change in policy this time around. That means the reaction could hinge on expectations for the next meeting, and that’s where there is a lot of uncertainty. Which is important, because the general understanding is that the BOE won’t spring a rate cut on the market.
Consequently, if the BOE actually will go through with easing in June, then during this meeting they will have to provide a strong suggestion in that vein. If the BOE doesn’t provide that guidance, then the market is likely to resolve that June won’t be an active meeting.
The Potential Market Reactions
The market’s reaction will depend on whether the BOE actually goes through on what is expected to be a change in the statement at the very least. Even though there is no change in the policy or statement, it would likely be seen as hawkish by the markets and could leave the pound substantially strengthened.
Economists are about evenly split over whether the first cut will happen in June, or later in the year. The market is inclined for the latter. There is a 38% chance of a rate cut in June that is priced in, which would potentially have to reverse if the BOE holds its ground. But the market is 88% certain that there will be a rate cut by August, and then marginally expects a further cut by the end of the year. Economists are more dovish, with the median suggesting three rate cuts by December.
Counting the votes
The factor that could shake up the markets could be the vote count. The last time around, it was 8-1, with perennial dove Swati Dhingra calling for a rate cut. A “punt” from the BOE would likely imply the vote count staying the same. Even if there isn’t any shift in the members’ votes, a dovish statement could suffice to convince the markets that June is at least a very likely candidate for easing.
A shift in the vote count, with other members joining Dhingra’s dissent would likely be a factor in just how dovish the market thinks the BOE will be. A 7-2 or 6-3 vote split would do more to convince the market of an impending cut than than a dovish statement by itself.
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