At the meeting the committee voted to leave interest rates and asset purchases (QE) unchanged at 0.50% and £375bn. Today’s release of the Minutes of MPC meeting 7 and 8 May 2015, were as analysts had expected that the members voted unanimously to stay unchanged. The headlines from the minutes were that two MPC members decision were “finely balanced” between unchanged and raising interest rates. The market impact from the minutes was minimal, the release was as the markets had expected, with last week’s quarterly inflation report providing a more current outlook for the MPC.
“Based on information from OIS rates, an increase in Bank Rate to 0.75% was now fully priced in by May 2016, around one quarter earlier than at the time of the April MPC meeting. The median expectation of economists responding to the May Reuters poll continued to be for an earlier increase in Bank Rate, in 2016 Q1” – May 2015 BoE MPC Minutes
When will the MPC hike?
Inflation has turned negative in the UK for the first time in 50 years, as the ONS released this data on Tuesday, Sterling weakened as traders believed that the rate hike argument for the near-term is waning. The expectation is that the two MPC members who believe the decision is “finely balanced” will probably vote for a rate hike in the June/July meetings. The current market expectation is for the base rate to be 25 bps higher by May 2016, with the majority of banks forecasting a conservative Q1 2016.
Over the medium term the likely driver for cable will be the timing of the Fed rate hike, which is expected to be September. The expected divergence in the timing of policy tightening between the Federal Reserve and the Bank of England, should lead to US dollar strength and see Cable retrace the recent move higher.