Dovish Rate Hike Coming From The Bank Of England

With the inflation rate at 3.0 percent hampering real wage growth and personal spending and the GDP growth exceeding expectations rising 1.5 percent over the year in the third quarter of 2017, the case of the Bank of England removing extra monetary stimulus in place since Brexit referendum last year is a sure shot.

The Monetary Policy Committee (MPC) of the Bank of England is seen raising the Bank rate by 25 basis points to 0.50 percent, bringing the key policy rate back to where it stood before the Brexit referendum last year.

The outlook for the higher Bank rate is justified by current resilience of British economy and prospects for higher inflation, anchoring the value of Sterling on forex market for now, but with November rate hike priced in, further development of Sterling depends mostly on the vote decomposition of MPC members with the greater the unity, the better for Sterling.  

Who votes for rate hike matters
The rate hike voting decomposition matters for the forex market as dovish rate hike (5-3 vote) may actually undermine Sterling’s position as two subsequent rate hikes next year would be clouded.

There are two clear hawks within MPC voting permanently in favor of rate hike, namely Ian McCafferty and Michael Saunders. The Bank of England chief economist Andrew Haldane seems close to joining the hawkish camp with economic reasons of resilient growth. Governor Mark Carney and Deputy Governor Benjamin Broadbent are expected to form the core voting group and adding Gertjan Vlieghe after his hawkish comments on wage growth in September. This group of 6 MPC members voting in favor of rate hike leaves remaining three members in doubts.

The forex market is currently expecting 7-2 or 8-1 voting pattern. Given the ultra-dovish stance of new MPC member Sir David Ramsden during the last parliamentary Treasury Select Committee hearing, it is actually about how Silvana Tenreyro and Deputy Governor Jon Cunliffe are going to vote. Both with Tenreyro and Cunliffe signaled they are in no immediate rush for higher interest rates, regardless of other major central banks already fully in the tightening cycle.

A possible 5-4 and 6-3 voting patterns seen Sterling negative unveiling discomfort and lack of common ground within MPC. 

UK GDP above estimates
The UK economic growth rate picked up during the third quarter, with the preliminary estimate of the third quarter growth showed a quarterly rise of 0.4 percent, coming in above market expectations. This means that the UK economy accelerated from 0.3 percent q/q growth reported for both first and the second quarter of this year. The annual growth rate of UK GDP, however, remained at 1.5 percent in third quarter, unchanged from the previous period.

The services sector played a dominant role in the UK GDP growth in Q3 rising 0.4 percent q/q. Industrial sector also contributed positively to the third quarter growth, while construction sector was a modest drag on the growth as the sector contracted in the quarter. 

The monthly index of services published along with the GDP released indicated growth rebounding to 0.2 percent month-on-month in August after an upwardly revised -0.1 percent sequential growth in July.