BoE: No fireworks expected next week - Nomura

Analysts at Nomura explain that less than two months ago a rate rise at the May BoE meeting had seemed a sure thing as following the Bank’s communication at its March meeting markets were pricing in a more than 90% probability of a move on 10 May (though Nomura had been arguing this was too high even before the data suggested against a move).

Key Quotes

“How quickly things can change. Since then, the data – both domestically and overseas – have taken a turn for the worse as evidenced by the surprise indices which have fallen sharply, particularly in the UK and euro area. While we think some of the slowdown has been temporary, it still removes the urgency for a further increase in interest rates.”

“As a result, neither we (following our altered call after last week’s weak GDP release) nor the markets are expecting a move in rates at next Thursday’s meeting (market pricing is currently around 10% probability of a move). Despite no change in policy, the Bank’s communication – both verbal and in its inflation forecasts – will be crucial in flagging the extent of future tightening that the MPC views as appropriate.”

“At the moment the market is pricing in only around two hikes by the time of the August 2019 Inflation Report meeting. We will be watching closely whether the Governor echoes the sentiments he expressed in his BBC interview (if he does it will probably be taken as being a hawkish signal given the focus on the need for future rate hikes, rather than the dovish interpretation it rightly received last month) and also the Bank’s two-year- and three-year-ahead inflation forecasts (though beware interpreting a mechanical link to policy from these numbers).”