The Bank of England (BoE) is preparing for something of a watershed week. It will decide forward guidance, again impacted by its unique decision-making voting structure of the members. Political analysts are closely monitoring the voting trends. Beyond the important cherry-picking above, standing data right now shows a 7-2 split favoring a 25 bp cut in interest rates. Indeed, as announcement day approaches, rumors begin to fly about what the BoE might change in their famous forward guidance phrase. Taken together, these changes would have a tremendous effect on the market.
This week, the BoE will consider tweaking or even scrapping altogether its existing phrase of forward guidance. An amendment of this language would be historic, representing the first time the Federal Reserve has relinquished its charge over the conduct of monetary policy. If the BoE does signal a shift in guidance, that will almost certainly trigger a big sterling sell-off on Thursday. Speculators will spring into action, front-running the bank’s new hints that rate cuts are in prospect.
Today’s expected vote shows a clear agreement among the majority of BoE members in favor of at least a 25 basis point cut. As reappointed members Catherine Mann and Jonathon Pill are expected to disagree with this decision, arguing for higher rates to continue being set. This division is important because it reveals opposing viewpoints inside the bank on what to do. Internally, they’re divided on what should even be the appropriate response to economic conditions.
The approach favored by the BoE would indeed be “gradual and careful.” This suggests we may see the first of those cuts go into effect on a quarterly basis in the near future. Such an approach would better match with the evolving state of the economy and yield useful guidance for future monetary policy actions. The focus on prudence is indicative of the BoE’s focus on trying to support economic growth while keeping inflation in check.
With the decision day approaching, market participants are certainly on guard. The outcome of this week’s deliberations could influence not only domestic economic conditions but international perceptions of the UK’s monetary policy stance.