GBP: How hawkish? - Rabobank
Jane Foley, FX Strategist at Rabobank, suggests that this afternoon it is the turn of the BoE to signal its latest thinking on inflation, growth and monetary policy.
Key Quotes
“Since the Bank’s last policy meeting in December, the market has brought forward its expectation of the next BoE hike. A 25 bps rate hike is now fully priced between Sep/Nov and the market is partly priced for a move as soon as May. This is consistent with recent remarks for BoE Governor Carney which have been mildly hawkish in nature. Today, the market will be watching the BoE carefully to decide whether or not a May rate hike is truly in the running.”
“Last year the BoE made two very interesting assumptions. The first is that wage growth would recover and the second was that the Brexit process would be smooth. Both of these issues could have significant impact on the extent and timing of BoE monetary policies decisions. The minutes of the December policy meeting point to the progress that had been made in the first phase of the UK/EU Article 50 negotiations. They concluded that “this would reduce the likelihood of a disorderly exit (from the EU) and, was likely to support household and corporate confidence”.”
“The relative resilience of the pound between late November and the start of this month suggests that progress in Brexit negotiations did boost market confidence. That said, over the past couple of weeks, deep divisions within the UK government, talk of a leadership challenge and a realisation of the great distance between the UK and EU on trade related issues have again risen to the fore. Political uncertainty could certainty weigh on confidence going forward and in turn this would have an influence of BoE policy decisions.”
“There is still plenty of evidence suggesting that consumers are wary of making big ticket purchases. This is likely in part a function of political uncertainty and partly a result of high inflation eroded purchasing power. There is also evidence that political uncertainty has weighed on investment in the UK. Although the cyclical recovery has brought a recovery in investment, Carney recently commented that it is around 4 ppts below where it would be otherwise. Although this may suggest that there is good reason for the BoE to remain cautious with respect to policy tightening, low investment also means that capacity constraints are likely to be hit sooner rather than later. It is clear from the December MPC minutes that the Bank is very concerned about the erosion of slack in the economy over the past year, particularly in the jobs market.”
“Tight conditions in the UK labour market means that earnings data are likely to be the key determinant as to whether the BoE decides to hike once or twice this year. A speech by the MPC’s Saunders in mid-January provided more colour to the Bank’s concerns about prevailing tight labour markets conditions. He refers to business surveys which suggest that staff recruitment difficulties have worsened over time and he details the strength of wage growth in Eastern countries which has limited the supply of workers to the UK. In his view “further tightening in the labour market is likely to cause underlying pay growth to pick up from about 2¼% recently to about 3% this year and probably a little higher next year.”
“It is possible to infer from the tone of the BoE that there is support for a second rate hike this year. However, this assumes that wage inflation does indeed pick up. Given that official earnings numbers are still subdued and given also prevailing political uncertainty, we maintain a call for one BoE rate hike at the end of this year – though we will be watching wage growth numbers carefully. Near-term, the assumption of a hawkish BoE today makes GBP vulnerable to a disappointment. Medium-term, in light of political uncertain we see upside potential in GBP as limited and look for a move towards EUR/GBP0.90 on a 6 mth view.”