The Bank of England's October minutes and interest rate decision: What economists will be watching

 
Jessica Morris
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The MPC is expected to vote 8-1 to hold interest rates (Source: Getty)

With the minutes from the Bank of England's October meeting expected to be somewhat uneventful, economists are preparing to drill into the detail for clues as to when it will start raising interest rates.

Tomorrow's meeting is the one before so-called "Super Thursday", which will see the release of the Bank's interest rate decision, minutes and quarterly inflation report all at once.

"Any shift in Bank of England guidance is more likely in November, but with current market pricing already distinctly dovish the MPC may be reluctant to unveil major forecast revisions," Ross Walker, UK economist at RBS, said.

The monetary policy committee (MPC) is widely expected to vote 8-1 to hold interest rates at 0.5 per cent, and keep its asset purchase programme unchanged.

More hawks to ruffle the Bank's feathers?

Some economists expect one Bank of England rate-setter to join hawk Ian McCafferty in voting for a hike, however most will be looking for more hawkish overtones as an indicator of this happening in November.

Unit labour costs, which show how much workers are paid to produce one unit, and are an indicator of underlying inflationary pressure in the UK economy, beat economists' expectations in the second quarter.

Sterling has also weakened since the MPC's last meeting in September, adding upwards pressure to inflation, as it effectively increases how much it costs to import goods from other countries such as the US and Europe.

"Last month’s minutes showed that there were some members of the MPC that already saw upside risks to the Bank’s inflation projections. This movement in the pound should make them even more confident in that view," Clarke added.

That PMI survey ...

Economic data released earlier this week showed that the UK services sector, which accounts for 78 per cent of economic activity, grew at its weakest pace in more than two years. And while today's industrial production figures were better-than-expected, economists warned the economy is still likely to slow in the third quarter.

It will be interesting to see what MPC members make of this; given they balance the strength of the UK economy against external headwinds, when deciding whether to raise rates.

Financial markets are getting it wrong

Traders have been busily pushing back their expectations for an interest rate rise from the Bank of England, with markets showing they don't expect lift off until 2017, but according to economists this is simply wrong, and the Bank could use this month's minutes to signal this.

"In our view, this is unwarranted, and the minutes will signal as much, as the news on the month is marked by further evidence of firming wages and unit labor costs and, if anything, a slight easing of external headwinds," Daniel Vernazza, economist at UniCredit, said.

External headwinds will feature

Last month's monetary policy meeting took place in the aftermath of "Black Monday" when panic on China's trading floors rippled through global markets. This was part of the reason the US Fed held off raising short-term interest rates for the first time in nearly 10 years in September.

External headwinds from China's slowing economy and financial market turbulence have eased since then, and the minutes could show what the Bank makes of this.

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