The minutes from the August meeting are released today at 9:30. What is likely to matter for GBP is the extent to which the policy rate vote and content of the discussion reflects the more dovish Inflation Report. We expect no new information to be forthcoming in the minutes, with no change in the policy vote, alongside a more elaborate, but more balanced discussion of QE suggesting it is some way off. Furthermore with GBP already higher on the anticipation that rising inflation and limited efficacy of QE will keep further asset purchases at bay, we believe this information is already largely priced. Consequently, we expect the minutes to have little impact on GBP today.
The Inflation Report is the main vehicle through which the MPC presents its views on the outlook for growth and inflation. The August report surprised the market with its more dovish stance. Not only was the GDP forecast lowered (largely as expected), inflation was judged be below target at the forecast horizon despite a very flat yield curve.
Given the proximity of the policy rate meeting to the publication of the Inflation Report, the dovish tone of the Report is likely to be reflected in the minutes. However, our economists do not believe the deterioration in the UK outlook is sufficient to prompt Weale or Dale to change their vote. This is also the consensus expectation. And while the market may believe the risks are to the downside, the perceived risk of someone re-joining the “no-change camp” is small, particularly as Weale expressed his clear support for further hikes just prior to the MPC meeting. Consequently, should the consensus hold, the upside for GBP will likely be small. Should the vote change, we would expect GBP to depreciate substantially.
Given the weaker outlook, the market is also likely to be expecting further asset purchases to be discussed. Discussion of QE returned to the MPC minutes in June, but was absent in July. We believe its omission reflects the MPC’s surprise at the market’s negative reaction to the June minutes. Because of this, if QE does feature today, the discussion may be more elaborate, but also more balanced.
Again, this is unlikely to provide much support for GBP, in our opinion. GBP has already rallied on pared-back expectations for QE following yesterday’s above-consensus CPI inflation print and comments by Mervyn King (a proponent of QE) that there is a limit to what monetary policy can achieve.
Therefore, unless the minutes surprise the market by a fall in the number of hawks or suggestions that further QE is closer at hand, we think GBPUSD is likely to remain supported, but not push substantially higher.
BARCLAYS CAPITAL
ECONOMICS RESEARCH | INSTANT INSIGHTS