Yuri Gripas | Reuters
Bank of England Governor Mark Carney leaves after speaking at 2017 Institute of International Finance (IIF) policy summit in Washington, U.S., April 20, 2017.
Summer data appear to have given doves a boost ahead of Thursday’s Bank of England (BOE) rate decision, with just 2.5 percent of analysts polled by Reuters expecting a rate rise.
Investors seem to be nodding in agreement with market indicators pointing to a mere 8 percent chance of a 25 basis point tightening this week. Yet at the beginning of the summer, divisions at the bank’s MPC’s (Monetary Policy Committee) were sharply exposed with a surprise 5-3 vote split on whether to raise interest rates.
The hawkish minority saw inflation – measured by the consumer price index (CPI) – consistently above the BOE’s target of 2 percent while unemployment reached 40-year lows.
Meanwhile, doves – who believe in easy monetary policy and are more concerned on jobs – preached that inflation has peaked, and warned on sluggish growth rates amid a backdrop of volatile Brexit fueled politics.
While these fault lines remain, heading into the meeting the second-quarter data increasingly support the latter argument and Governor Mark Carney’s Brexit-fueled concerns.
Inflation has been central to Threadneedle Street’s recent focus. Contrary to most of the developed world it has been high, reaching 2.9 percent in May. In this context June’s CPI reading was significant coming in at 2.6 percent emboldening those who have argued peak inflation has been reached.
In addition, as Morgan Stanley analysts pointed out last week, even this is not the result of a booming economy and rising service prices but rather goods inflation, susceptible to one-off external factors like the politically-induced weaker pound. Governor Carney is known to be looking for more domestically generated inflation before fully buying into what look like robust CPI numbers.