Spread Betting Event Preview: Bank of England meeting

Sterling has produced some aggressive moves this week, bouncing off last Wednesday’s lows as traders look ahead to Thursday’s monetary policy meeting from the Bank of England (BoE). While there is no expectation for rates to be dragged off the floor, there could still be some juicy price action around the meeting itself. Mixed economic reports and the spectre of Brexit mean there’s nothing certain for the pound as we look ahead to the monthly interest rate decision.

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Inflation Picks Up

Coming into the meeting, the pressure is off the Bank a little after a report on Tuesday showed inflation picked up in March to hit a 15-month high.

Consumer prices rose 0.4% on the month, from 0.2% in February. Year-on-year, inflation was 0.5% for March, a lot better than predicted. Oil still weighs on prices, but growth elsewhere was more than enough to offset the weakness in crude.

An early Easter boosted sales, particularly air fares, but the highly uncertain economic picture - further confused by doubts over a potential Brexit - mean few think the Bank has any appetite to change tack.

A weaker pound may also be helping inflation as higher import prices feed through. Britain may not be an active combatant in the currency wars, but it’s not losing out either.

Productivity Puzzle

On the other hand, productivity remains in the doldrums, stifling wages and prices despite the ‘jobs miracle’ of the last few years.

Economic output per hour of British workers suffered a 1.2% decline between the third and fourth quarters last year- the steepest drop since the recessionary period of Q4 2008, according to data released last week.

Weak productivity growth since the financial crisis has been the stickiest problem for the Bank and one that continues to confound economists.

A Bank report from 2014 pointed to the “exceptionally weak” labour productivity in the UK. There has been little improvement since; nascent shoots of improvement last year have withered.

James Sproule, chief economist at the Institute of Directors, thinks there is little room for improvement this year either as the National Living Wage is introduced. This move, which will raise earnings for over-25s, “will very likely result in continuing poor performance in productivity in 2016”, he said.

Interest Rates Expectations Anchored

Governor Mark Carney has consistently stressed that when rates do climb, they do so gradually and that the new ‘normal’ will be materially lower than historic averages. That had been seen as a sign that rates could rise soon (it’s easier to raise slowly if you act faster) – only last year the BoE and Fed were neck-and-neck in the race to tighten. But the mood has changed appreciably in the last few months, particular with the EU referendum weighing.

The Bank is widely expected to keep rates at the historic low of 0.5% for the time being. With lone hawk Ian McCafferty altering his stance to be more accommodative of late, there is little chance of a rate hike this month.

In fact, according to a Reuters poll of 50 economists, the Bank won’t raise its benchmark lending rate until 2017.

Sterling Moves

For spread betting, the BoE meeting ought to offer some interesting price action to trade sterling. With the minutes of the meeting also released, traders will be eyeing any change in the language from the MPC and whether it's another 9-0 vote or if we see any dissent. And for the first time in a while the dissenting voices could be on the dovish side (calling for easier monetary policy) rather than hawkish.