The Minutes from the July BOE meeting was released earlier today.The MPC voted 9-0 for unchanged Asset Purchase Facility (at GBP 375 bn) and 9-0 for unchanged base rate at 0.5%. The outcome was a hawkish surprise for markets who probably anticipated a 7-2 vote as regards the APF-program. The Minutes seeks out to strike a balance between the modest pick-up in UK growth prospects as seen in leading indicators and driven by growing Private consumption versus the need for keeping low interest rates for long and financial conditions loose. BOE is currently seeing less merit with increasing the APF additionally and sites risks for exiting such policies. At the same time, the central bank is unhappy with markets pricing a policy rate tightening already in 2015 judging by its assessment of current economic developments and the level of resource utilisation.
The key take-away ahead of the more important August Inflation Report (IR) where the central bank will lay out its framework for the so called Forward Guidance is that BOE will certainly steer markets to expect policy rate tightening no earlier than 2016. Then there will also be large question marks as regards the shape and form what the Forward Guidance will look like. Productivity has been poor for long and unemployment is hence lower than warranted by the weak (or absent) level of economic growth. BOE also says that the historical level of GDP has been revised lower by 1.5% and that the current rate of production is still a whopping 4% below pre-crisis level. Hence the level of resource utilisation is very low but it’s not fully reflected in the level of unemployment. This brings doubts whether the central bank will adopt a Fed-inspired target for the unemployment rate before exiting APF / lifting the policy rate. Or, will BOE instead guide with a date when rates will be lifted at the earliest? Or a combination of both? There are probably other alternatives available as well (level of economic growth?) but the deliberations in the Minutes suggest BOE will use a combination or at least a target for the level of economic activity (unemployment) rather than referring only to a certain date. Markets will have to wait until the BOE Inflation Report on Aug 7th for a clear answer. No monetary policy changes are expected at the next BOE meeting (Aug 1st) and probably no statement will be issued as Forward Guidance will be explained in the IR. We expect the Inflation Report to be modestly dovish compared to current market expectations and we remain with the view that Sterling is (still) a sell on rallies (10.20/40 in GBP/SEK).
SEB