The market will be scouring for any potential hawkish signals
But there are a couple of other variables/moving parts that may see some mixed reaction when interpreting the outcome of the BOE decision later today. Let’s get straight into it.
The bank rate is to be left unchanged at 0.10% and the vote split should be unanimous in favour of keeping rates unchanged for the time being. So, no surprises here basically.
Now, this is where things start to get a little tricky. QE is set to continue at this point, so the vote split is the first thing to watch. A 6-2 vote is expected and that underscores the status quo among BOE policymakers in debating the current QE stance.
I would expect the BOE to maintain a more optimistic outlook on the economy, even if recent data may suggest that growth expectations have peaked after the reopening.
Inflation has also surged strongly in recent months and that is pretty much testing policymakers’ patience at this stage but I would still expect them to reaffirm that such conditions are still ‘transitory’ in defending their earlier assessment.
Negative rate preparations
The BOE gave UK banks half a year to make technical preparations for the possibility of negative rates and that was back in February, so the timeline fits with any specifics to be outlined when it comes to the above matter.
Review on tightening policy
The thing about this variable is that the BOE may not even make this announcement today but it is a risk worth pointing out and taking note of just in case.
The central bank has said that they are going to announce results from their policy sequencing review and this pertains more to the policy rate threshold before beginning quantitative tightening i.e. reduction in the balance sheet.
All things considered, this is where we could see the biggest reaction in gilts and the pound, depending on what the results of the review.
The policy rate threshold right now stands at 1.50% and there are a couple of ways the BOE can play around with this in guiding market expectations.
The first is to reduce the threshold to somewhere around or below 1.00% and that arguably leans more on the dovish side. A lower threshold basically means that the bank rate will not need to rise as much as quantitative tightening takes over instead.
A push to 1.00% is likely to limit impact in the market but I would still expect there to be a few waves once traders and investors have had time to digest the situation.
The alternative for the BOE is to state that they would reduce the balance sheet before raising the bank rate but I would argue this is a more unlikely option among the two.
But keep in mind that the review is merely a form of coordinating the BOE’s policy guidance and not necessarily an imminent change to policy specifically.