Thursday 12 May 2016 9:33 am

Five things to look out for from Bank of England's Super Thursday

It's the fourth instalment of the Bank of England's Super Thursday today, and traders, wonks and campaigners are pumped for some fireworks from the Old Lady at lunchtime today.

At 12pm, the Bank will unveil not only the latest decision of the rate-setting monetary policy committee (MPC), but the minutes from that meeting and its quarterly Inflation Report in a triple-dose of central bank action.

Shadow MPC: We back the Bank on "wait and see" approach

Here are five things to look out for when Carney and co treat us to a snapshot of their latest thinking.

1. A rate hike?

No chance.

The Bank effectively admitted in the minutes of its meeting last month that interest rates aren't going anywhere until after the EU referendum.

While once upon a time it was believed that the only way was up for the Bank – financial markets now put the chance of a rate cut by the end of the year at close to 40 per cent.

2. A unanimous vote?

The nine-strong MPC have been on the same side for the past three months, with all of them voting to hold interest rates. 

Ian McCafferty was the most recent member to break ranks – voting for a rate rise until January. He signalled in a speech recently that he will hold off voting for an increase until he is more sure of the UK economy – and inflation's – upward trajectory.

Without McCafferty to play the hawk, the MPC may still lose its united front this month. Scotiabank analysts said there was around a 50 per cent chance that somebody on the committee votes to cut rates, given the fact inflation is still running at only 0.5 per cent, wage growth has slowed and a number of economic indicators are running at their lowest level in years.

3. Dodgy forecasts

Six months ago the Bank thought the UK economy would grow by 2.5 per cent this year. In February, it cut that outlook to 2.2 per cent. Today, it is expected to revise its forecasts once more – pencilling in two per cent growth in the market-moving Inflation Report.

That would bring the Bank in line with the Office for Budget Responsibility and the International Monetary Fund.

However, expect the Bank to be even more cautious in how it presents these forecasts. The Bank will be producing its forecasts based on the assumption that the status quo prevails – i.e. Britian votes to remain in the European Union.

Read more: Bank steps up warnings on Brexit

But some of the factors which go in to producing its model are at least partially pricing in a Brexit. For instance, nobody expects the exchange rate to be the same on 23 June as it is on 24 June – it will move one way or another and this will affect the UK economy.

"The risk of a Brexit will affect the forecasts indirectly, most obviously through the MPC's assumption about the pound," Capital Economics' Vicky Redwood said.

"Brexit risk will also be incorporated via the market implied path of interest rates which underpins the forecasts," she added.

While markets can hedge and strike a balance between what they think the most likely, for the Bank's forecasts, it is impossible to strip out or isolate how much Brexit has already affected the UK economy, and how much these trends would accelerate or subside in the event of a vote to stay or go.

"So how will the MPC deal with this complication?" Redwood asked. "It could try to strip out the Brexit effects from its market forecasts. But it is impossible to quantify them. And the MPC did not do this in similar situations in the past."

In effect, the forecasts will end up being a strange mid-point that will probably never occur.

4. A message to markets

More interesting, perhaps, than the growth forecasts, is how the Bank of England will address its problem of communication. In short, the Bank thinks markets are too dovish on its expectations for the first rate hike.

Markets aren't fully pricing in the first rise in interest rates until 2019. But the Bank of England expects inflation to be back above its two per cent target by then. This means either the Bank is too optimistic about future inflation, the markets are too pessimistic or – like with growth forecasts – the markets have partially adjusted to take account of the Brexit uncertainty.

Read more: The MPC is a master of inaction

Carney is likely to use his press conference both to stress the weakness in the Bank's assumptions and to reassert that the rate-setters think rates will be going up a little quicker than the markets. Though, by historic standards, the ascent will be at a snail's pace.

5. Bigging up Brexit

For someone who wears the expression of a man who would rather talk about anything else, Mark Carney has a surprisingly common habit of getting stuck in to the Brexit debate.

The Inflation Report is the Bank's set-piece event. And today is the final one before the referendum, so expect Brexit to form a big part of the analysis.

Read more: Osborne clashes with Treasury Select Committee on Brexit

Carney has ruled out being drawn into counterfactuals and won't play the game of putting numbers on how the economy will fare outside of the EU. But he will certainly point out how he believes uncertainty in the run-up to the vote is hurting the UK economy.

The reports are out at 12pm, with Mark Carney's press conference kicking off shortly after. Stay tuned.

 

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