Thursday, the Bank of England will reveal its most recent interest rate decision. The consensus is for the BOE to leave its overnight interest rate at 0.25%. There is interest in this meeting because the British inflation data has risen and is now above Governor Mark Carney’s desired target. The most recent inflation data released on Tuesday sent GILT yields higher and put a strong bid to the British pound, pushing it to levels against the U.S. dollar unseen since the BREXIT vote. The EURO even lost ground to the British currency as the market NOW ASSUMES that the BOE will have to move to raise rates in response to rising price pressures.
Consensus calls for the Monetary Policy Committee to keep rates unchanged but the VOTE will be of concern to see if the MPC board is taking a more hawkish stance going forward. The previous board vote was 6-2 with two voters pushing for a rate increase last month. This month a new member has been, added fulfilling the prescribed nine positions, but the newest member is expected to follow the lead of Governor Mark Carney. So the result expected to be a 7-2 outcome. If the vote is 5-4 markets will deem this as hawkish and probably push the British pound higher against the euro and the U.S. dollar. Remember the surprise the Bank of Canada delivered last week and the violent rally in the Canadian dollar that followed.
We will need to watch any decision the BOE makes in regards to its current balance sheet of 435 billion pounds. If Governor Mark Carney wants to express some GENUINE concern about inflation he may well follow the lead of Chair Yellen and President Draghi and hint at some near balance sheet shrinkage. The market is NOT ANTICIPATING any such decision on the balance sheet so any headline indicating such an outcome will precipitate a BRITISH POUND rally. Such a rally OUGHT to cause the POUND to approach the first post-BREXIT day high of 1.3686 to the DOLLAR (June 27, 2016). Currently we are trading at 1.3200 so this would be a 3% rally in the British currency.
I found it crazy that the market REWARDS the BOE with a stronger currency for running a higher inflation rate with the hopes that it will force Governor Carney to raise rates.In traditional fundamental currency analysis a higher inflation rate would signify a lower REAL YIELD and be a negative–but in today’s world of central banks breaking the signaling mechanism of interest rates our traditional barometers are BROKEN. Be patient and watch the GILTS, POUNDS and EUROPEAN SOVEREIGN BONDS for indications.