Bank of England will decide about the rates and asset purchases in today’s meeting. No immediate changes are expected by the markets but possible hints about future tapering and rate increases will bring volatility to the FX markets. Here are some key points for this meeting:
(UK CPI YoY Change)
Inflation is over the BOE’s target and the momentum hints at further increase until 2022 while employment is still too low relative to pre-Covid times. With Covid-19 restrictions ending and unemployment problem will lessen which will cause more upside risk to inflation. Furthermore, the British saved more money from the rest of the world during the pandemic, when the restriction end, this will increase the upside risks as well.
(Daily Covid-19 Cases)
Despite the upside risk to inflation, the new delta variant may change the economic course. Daily cases past 15k as the delta become dominant and graph hints a possible new wave. A new wave means restrictions may last longer than expected, GDP and CPI expectations will dampen. But it is still unclear how it will unfold and that unclearness can delay a clear decision from the Bank of England. Today’s decision will be weighted between unemployment – a new wave risk and the upside inflation risk.
Credit Suisse and Bank of America, already change their rate forecasts to 2022 and the market is pricing a possible June 2022 increase. For this, at least a hint from the BOE in this meeting or the next may be necessary.
Another key point is that today’s meeting will be the last of Chief Economist Andy Haldane’s. He is working at the BOE for years and he is a known hawk. In his last meeting, he is expected to warn other members about the upside risks of inflation.
He will be replaced with Catherine Mann, former OECD, and Citi Chief Economist.