BoE Preview: Three scenarios and their implications for GBP/USD – TDS

Economists at TD Securities discuss the Bank of England interest rate decision and its implications for the GBP/USD pair.

Hawkish (10%)

“The MPC hikes 25 bps but in light of the notably strong wages and inflation data, the Committee reintroduces the guidance that it expects ‘further increases in Bank Rate’ will be required if the economy evolves as expected. While the forecasts will likely show inflation being revised down in the long-term, the MPC emphasizes that the upside skew has increased further – necessitating a more aggressive policy response. GBP/USD +0.30%”

Base Case (70%)

“The MPC hikes 25 bps and leaves guidance essentially unchanged, though the language around financial and banking sector instability might be a bit softer. In doing this, the MPC essentially leaves another 25 bps hike in June on the table. The vote is likely 6/3 for 25/0, with Cunliffe joining Dhingra and Tenreyro in voting for a hold. Inflation projections will probably be tweaked slightly, though this should have limited policy implications given the substantial uncertainty bands around the projections. GBP/USD -0.15%”

Dovish (20%)

“The MPC hikes 25bps but signals a BoC-style ‘conditional pause’. Forward guidance is softened to ‘If there were to be evidence of more persistent pressures, further tightening in monetary policy would may be required’. While the latest wages and inflation data came in notably hot, the Committee emphasizes lower inflation expectation, further declines in commodity prices, and uncertainty about financial and banking sector stability as reasons why further rate hikes probably are not required. GBP/USD -0.60%”