Global Economics & Markets Research
Company Reg No. 193500026Z
Lee Sue Ann
[email protected]
Quek Ser Leang [email protected]
Friday, 05 September 2014
Flash Notes
BoE: No Action; Minutes Will Matter More
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No policy change from Bank of England (BoE), but minutes on 17 September will be closely watched in terms of
dissenter risk.
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We expect a similar outcome to August, with Martin Weale and Ian McCafferty voting for a hike, and the remaining
seven members voting to keep policy on hold.
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UK data has been broadly dovish, and there have been increased uncertainty over the Scottish referendum on 18
September.
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Two dissenters within the MPC do not necessarily mean that chances for a rate hike have increased. In fact, recent
history suggests it is not a given.
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Considering these factors, we think the case for the dovish majority to keep policy unchanged remains high, and we
continue to believe that an interest rate hike before the end of this year looks unlikely.
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Our shorter-term technical view suggests that the bearish trend in GBP/USD looks intact. Further out, we also see the
GBP/USD moving lower, and have revised lower our GBP/USD forecasts, now penciling in a year-end target of 1.600.
The BoE kept policy on hold, leaving the Bank Rate at 0.5% and targeted asset purchases at GBP375bn. Like usual, the
central bank made no statement, so we will need to wait until the release of the MPC minutes on 17 September. That will
be closely watched in terms of dissenter risk following the 7-2 vote on 7 August. That said, we expect yesterday’s outcome
to have matched that of the August meeting, with Martin Weale and Ian McCafferty voting for a hike, and the remaining
seven members voting to keep policy on hold.
Data since then has been broadly dovish, with softer wages, inflation and manufacturing PMI. Even though the jobless rate
continues to move downwards, the latest being 6.4% in the 3-months to June, the bulk of the MPC members are paying
close attention to average wage growth developments. We believe they are keen to see firmer evidence that solid increases
in pay growth are in prospect before starting to tighten policy.
Another factor that may have eased the pressure on the BoE to tighten their stance is the fall back in inflation. CPI rose by
just 1.6% in the year to July, according to the Office for National Statistics. The figure dropped from 1.9% in June, with little
sign of more pressure building up. Meanwhile, producer prices dipped by 0.1% in the year to July, and the price of material
and fuel bought by UK’s factories for processing fell 7.3%. It was the steepest decline in almost five years. The subdued
nature of price trends should serve to buy the MPC some more time.
There has also been increased uncertainty over the Scottish referendum on 18 September. Scotland will hold a referendum
on whether to leave the UK, and opinion polls suggest that the gap between the ‘Yes’ and the ‘No’ camps has narrowed but
that a ‘Yes’ vote in favour of independence remains unlikely.
Furthermore, two dissenters within the MPC do not necessarily mean that chances for a rate hike have increased. In fact,
recent history suggests it is not a given. Andrew Sentence began voting for rate rises in June 2010 but was on his own for
seven months before Martin Weale joined him. A month later, in February 2011, Spencer Dale joined them in voting for rate
rises and there were four months of a 6-3 split. Andrew Sentence left the MPC in May 2011 and two months later, the others
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Flash Notes
Friday,05 September 2014
Page 2
dropped the call for rate rises. So even a period of 6-3 voting does not necessarily mean rates will rise. We probably need
to see a dissention from internal members (i.e. Carney, Broadbent, Shafik, Cunliffe, Haldane) to be considered much more
hawkish. Considering these factors, we think the case for the dovish majority to keep policy unchanged remains high, and
we continue to believe that an interest rate hike before the end of this year looks unlikely.
Seen hovering just a tad above the 1.6300-figure, GBP/USD was seen touching 1.6287-lows earlier this morning. Our shorterterm technical view suggests that a break below the major support at 1.6505 earlier this week was the precursor of GBP
weakness. The current drop is led by strong downward momentum and market is now eyeing a move towards the year-to-date
low at 1.6252. The latest available CFTC report from last Friday is still showing a net long position for speculators suggesting
that a clear break below the year’s low could lead to acceleration lower (next support is at 1.6100). The bearish trend is intact
as long as 1.6420 is not taken out. This is in line with our fundamental view of a lower GBP/USD into year-end, largely due
to a broadly stronger dollar on the prospect of Fed tightening. We also think that GBP/USD will need a greater BoE dissent
to rebound sharply from here. We have revised lower our GBP/USD forecasts, now looking for a year-end target of 1.600.
Disclaimer: This analysis is based on information available to the public. Although the information contained herein is believed to be reliable, UOB Group
makes no representation as to the accuracy or completeness. Also, opinions and predictions contained herein reflect our opinion as of date of the analysis
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URL: www.uobgroup.com/research
Email: [email protected]