All eyes on the Bank of England at 10.30 this morning, as the Inflation Report is unveiled.
Several analysts are predicting that the central bank could adopt a Fed-style unemployment target. UK unemployment was at 7.8 per cent in the three months to May.
Emily Nicol, Daiwa Capital Markets:
The main policy event today will come from the UK as the BoE presents its latest Inflation Report and, of greater significance, announces what the MPC has agreed in terms of new forward policy guidance. While highly uncertain given the wide range of views that likely exists among its members, we expect the MPC to adopt a Fed-style approach. So, for example, we suspect that it will announce a commitment to hold Bank Rate at its current level until an unemployment target (perhaps 6.5% like the Fed) is met, subject to some sort of caveat on inflation expectations remaining well-anchored.
Alongside that the MPC may well also alter the way it presents its forecasts – again like the Fed, further information on individual members’ views on the likely path for interest rates seems entirely plausible. Meanwhile, following solid Q2 GDP growth, recent strong sentiment surveys and relatively contained albeit above-target inflation, the report should be upbeat about the economic outlook. Indeed, we ought to see the Bank revise up its near-term growth forecast.
Rob Wood, Berenberg:
The frontrunner in our view is that the BoE ties interest rates to an unemployment threshold. If the BoE does this, then it would probably say rates will stay low until unemployment falls to 7% as long as inflation is expected to be close to target in three years’ time.
Jim Reid, Deutsche Bank:
Carney is widely tipped to announce some form of forward guidance alongside the inflation report but what form this guidance takes remains uncertain. DB expects “loose-form” guidance from the Bank, rather than an explicit time or data-based “pre-commitment”.
An example of something that they could say in a statement would be: “The Bank intends to keep interest rates at their current level or below for a prolonged period (ECB-esque), and at least until the level of economic output has well surpassed its previous peak”.
However, were the latter part of this statement prove too explicit then our economists think it could be altered to “at least until the level of economic output has returned to more acceptable/normal levels”. There are clearly many iterations of such guidance that the MPC may have contemplated. Some market participants are also flagging potentially extensive changes to the content of the Inflation Report itself.
Kit Juckes, Societe Generale:
BOE Governor Mark Carney’s success with forward guidance in Canada is part of his CV, but ‘reaching over the heads of markets’ and telling the people of the UK that rates will stay low for a long time, won’t have so much effect. Rate expectations are already low.
As for markets, the biggest effect may be on inflation expectations. Breakeven inflation rates on index-linked gilts are well above those on US Treasuries, but could move higher. GBP/CHF remains a quiet buy, and if we get an outsized reaction (lower) in UK swap rates and shorter-dated gilt yields, I think that would represent a longer-term trading opportunity.