BOE Will Stress Downside Risks Even As It Says Market Too Dovish

With short-end U.K. rates now pricing the possibility of some Bank of England easing, Governor Mark Carney and the Monetary Policy Committee will walk a fine line on Thursday by highlighting downside risks while challenging rate path expectations two to three years ahead, economists say.

The pound faces a risk of a short squeeze this week as investors have already scaled back expectations for the timing of a rate increase, analysts say. The BOE rate decision, minutes and Inflation Report are due on Thursday at 12pm U.K. time while the press conference is scheduled to start 30 minutes later.

 

JPMorgan (Allan Monks) 

Expect 8-1 vote for rates to remain at 0.5 percent. The near-term inflation projection will be lower than at the time of the November Inflation Report, but the forecast for 3 years hence will be above 2 percent. That would indicate the curve is too flat, which may be seen as relatively “hawkish” by central bank watchers.

The overall tone will be that a near-term rate increase is off the agenda, consistent with a possible late-2016 or even early 2017 rate rise. This would be a dovish shift relative to November’s update, but in line with JPMorgan’s view that the central bank will lift rates in the fourth quarter of 2016.

 

Goldman Sachs (Andrew Benito) 

Forecast 8-1 vote for rates to remain at 0.5 percent. Expect forecasts for inflation in 2 years to be marginally higher than in November, while the 3-year estimate will be further above target. The MPC will probably say it wishes to avoid such an overshoot. 

That will, however, be moderated by comments about the downside risks, which will somewhat endorse market pricing.The biggest challenge to Goldman Sachs’s view is if the MPC sees low inflation as a significant risk to the anchoring of inflation expectations.