Bank of England meeting: 4 things to watch out for

Interest rates

No change is expected here, but the interesting commentary will be around how the bank will react to the various Brexit scenarios now confronting the UK. While the bank continues to state that it could either lower interest rates in the event of a no-deal scenario, or raise them, it seems that lowering them is the most likely course of action from a bank that did just that right off the back of the vote to leave in June 2016.

A recent speech from Michael Saunders noted that the possibility of tighter monetary policy in the future did not necessarily mean that it was time to tighten right away, especially since inflation remained muted while growth was steady.

The bank has stuck to its cautious tone, partly as a response to the continued uncertainty arising from the Brexit vote. The UK economy could be facing a no deal scenario within days, although that is still unlikely. Or it could see the UK Prime Minister Theresa May's deal pass at the last moment, which would require a short extension of Article 50, or it might see an extension of Article 50 into June or longer.

These varied possibilities mean that the bank must leave its options open, and while doing nothing might seem odd, it is better to await developments than to move prematurely and be forced into a swift reversal.

Quantitative easing (QE)

The European Central Bank (ECB) is preparing to conduct new targeted longer-term refinancing operations (TLTROs) to help stimulate the eurozone economy, and the Federal Reserve (Fed) has signalled that it is prepared to slow the pace of quantitative tightening if the need arises. But the BoE is not yet at the stage where it believes more QE is necessary. Certainly, a no deal Brexit would be one such eventuality, since the UK economy will require a cushion of stimulus, both fiscal and monetary, to help it ride out the no deal storm.

But for now, as with interest rates, it is best to hold steady on monetary policy lest a greater need arises for looser policy via the medium of additional QE.

Economic growth

One area where BoE hawks (those looking to tighten policy) can be said to have the upper hand is in employment. January jobs figures showed a drop in unemployment to 3.9%, the lowest level since the final quarter (Q4) of 1974. The economic inactivity rate, which measures the proportion of the working-age population that is neither in work nor seeking work, fell to 20.7%, a record low. While inflation is ticking along at 1.8%, wage growth for the three months to the end of January rose 3.4%, both including and excluding bonuses.

Gross domestic product (GDP) growth is continuing to decline, and while the services purchasing managers index (PMI) is holding around 51, the manufacturing PMI has dropped in recent months, though it is still in expansion territory. There are significant risks to the UK economy, most of them to do with Brexit, but the weakness is also due to the significant slowdown in the eurozone economy, the UK’s largest trading partner. To some degree, UK growth will not pick up until the eurozone’s does, and thus the fate of these two remains intertwined, regardless of the Brexit outcome.

Impact on sterling

The BoE’s cautious approach would suggest that the pound will not see too much movement off the back of the meeting. Instead, most sterling traders remain focused on the Brexit situation, where a third Meaningful Vote may still occur despite the Speaker’s verdict. Unless the economic situation is revised up, or there is a notable shift towards a hawkish caucus on the Monetary Policy Committee, the impact on the pound will likely be limited.