BoE’s Carney faces up to hawkish market as bets on May hike grow

Bloomberg

The Bank of England’s (BoE) first policy meeting of the year is also the first test of the market’s newly aggressive interest-rate forecasts that emerged in recent weeks.
Investors have ramped up bets that the follow-up to November’s tightening — the first in a decade — will come as soon as May, and economists in the latest Bloomberg survey agreed. The shift from the previous consensus of no move until the end of the year follows upbeat growth and labor-market data, and Governor Mark Carney appeared to offer a less pessimistic view of the economy last week.
The BOE publishes its next policy decision on Thursday along with the Inflation Report, where it updates its forecasts for the economy. Carney holds a press conference just after the release. If the Monetary Policy Committee is moving closer to an increase, it’s an opportunity for him to prepare the market, and the British public, for higher rates.
“The data have been stronger,” said Ross Walker, head of European economics at NatWest Markets. “They will edge closer to a May hike, and signal that this is very much a live consideration.”
Markets are now pricing in a 60 percent chance of a move in May, rising to about 90 percent in August — up from 39 percent and 65 percent on Jan. 2. In the Bloomberg survey, 13 out of the 32 respondents predicted a May increase, more than any other month, while a further five see a move in August. Some firms, including Nomura International and the EY Item Club, even see two hikes in 2018.
Another strong sign that a hike could be imminent may come from the vote split among officials. Bloomberg’s survey showed most expect a 9-0 vote to hold rates, though Bloomberg Economics
predicts a 7-2 vote. Ian McCafferty and Michael Saunders, who led the charge for an interest-rate increase last year, are the most likely to dissent.
Since November, officials have mostly stuck to the statement that more hikes will be necessary over the next three years, but they would be limited and gradual. Reports in January showed fourth-quarter growth accelerated to 0.5 percent, while employment and wage growth also came in stronger-than-expected.
Carney had a chance to push back against traders’ newly heightened expectations in front of lawmakers last week, but instead delivered a relatively upbeat message, stating the BOE was increasingly able to focus on meeting its inflation target as the cloud of the Brexit vote lifts. He said investment could pick up again next year and hinted that productivity growth may accelerate.
“He would have to be overly dovish to really push back on the market,” said Richard Kelly, head of global strategy at TD Securities.
Almost every economist in the Bloomberg survey predicts the BOE will boost its 2018 growth forecast this week, while most also see a downward revision to inflation at the far end of the central bank’s forecast horizon.
“An upward revision to its growth forecasts, showing that the committee expects the economy to grow at a faster pace than potential over the next couple of years, would send a clear message that the MPC intends to hike again soon,” said Andrew Goodwin of Oxford Economics.
The MPC is likely to revise growth up this year on the back of the news that the economy was carrying more momentum as it started 2018. Revisions to later years will depend, at least in part, on the outcome of the supply stocktake. BE doubts the committee’s reappraisal will be a gamechanger – the story of the forecast is likely continue to be one of an economy operating with little or no spare capacity over the coming three years,” said Dan Hanson, Bloomberg Economics. A downturn in economic data could still derail expectations. Services growth was weaker than expected at the start of the year and reports last week showed a slowdown in manufacturing and a near-stagnation in construction.
The UK’s exit from the European Union also remains a hurdle for the hawkish case. Britain risks “further adverse economic, financial, and rating outcomes” if it misjudges negotiations, S&P Global Ratings said in a report on Monday.
UBS Group AG, one of the banks to switch their forecast to May last week, did so on the condition that a transition period for after the Britain leaves the EU is worked out soon.
“They’ll be content with May priced about 50:50 at this stage,” said UBS strategist John Wraith. “The unspoken assumption will be that if a transitional deal is successfully agreed in late March, the market will move to price in May.”