Expect a more confusing narrative at the August BoE meeting than a Game of Thrones episode, though only a clear dovish message would weigh on the pound
Signal 1: How close are the MPC to hiking rates?
Our base case is for the MPC to keep rates on hold this week with a 6-2 split vote (McCafferty and Saunders dissenting). This should be a neutral to slightly negative outcome for GBP; despite the OIS curve pricing in little chance of a rate hike this week, recent BoE talk means that markets are going into the August Super Thursday meeting with a slightly hawkish bias and a vote split of only two active dissenters could be seen as a disappointment.
A 6-2 MPC split vote will be a neutral to slightly negative outcome for GBP
Admittedly, we don't see our central scenario meaningfully weighing on GBP given that (a) it is the most probable outcome and (b) policy signals elsewhere, most notably the meeting minutes, are likely to raise prospects of 'silent hawks' - that is one or two MPC officials who were close to voting for a hike this month.
Any deviation from a 6-2 vote split is likely to have a more lasting impact on GBP - with the risks fairly symmetric in the event of a dovish or hawkish surprise:
Signal 2: Is the tolerance for above-target inflation fading?
The key area of focus in the policy statement will be the language around the tolerance for above-target inflation and whether this has reduced or increased in the eyes of the MPC. Both the softer core inflation print this month and declining trend in market-based inflation expectations suggest that the majority of the MPC should have a greater tolerance for above-target inflation - at least relative to the prior meeting. Any softening of language over the MPC's inflation concerns will be perceived as a dovish signal and is likely to weigh on GBP - though, in reality, we are unlikely to see any real consensus here.
Signal 3: Will the Quarterly Inflation Report (QIR) introduce a new policy risk?
The recent run of data in the UK means there are slight downside risks to the 2017 growth and inflation projections made in the May QIR. However, in the absence of any wholesale changes, this is unlikely to be new news for GBP markets - which have to some extent already priced in a softer near-term economic outlook. The BoE currently sees NAIRU at 4.5% and while the latest jobs report saw the unemployment rate reach this figure, we do not anticipate any major changes to the Bank's assumptions over the degree of labour market slack. Indeed, doing so would inadvertently have consequences for the (optimistic) outlook for wage growth that is partly underpinning the hawkish BoE sentiment.
One possible hawkish tail risk that we could see emerge from the Aug QIR is if financial stability concerns over persistently low interest rates were added to the MPC's list of key judgements. The May QIR briefly touched on this idea and while the current approach from the Bank has - rightly so - been to use the FPC toolkit to address any financial vulnerabilities, some MPC officials may see growing leverage risks as another reason to start removing the ultra-accommodative monetary stimulus.
Signal 4: Will we get an emerging consensus in the MPC minutes?
Most probably not. The minutes are likely to serve best at highlighting the current dichotomy within the MPC; the range of views on show - and little consensus on key policy judgements - means that we expect markets to remain confused over the Bank's near-term policy bias. There will be enough for both the market doves and hawks to cling onto and the lack of clarity means that a 30-35% chance of a November rate hike is likely to remain in place - which will ultimately leave GBP directionless.
Status quo from the BoE this week - and a lack of emerging consensus over how best to address the growth-inflation trade-off - is unlikely to have a major impact on short-term UK interest rates or the near-term outlook for the pound. While some of the recent hawkish sentiment may fade as a result of the Bank showing little appetite for a policy change, we suspect that only a formal ruling out of a 2017 rate hike by Governor Carney - if explicitly asked in the post-meeting press conference - would have a sustained negative impact on GBP. We see this as highly unlikely given that BoE officials will probably want to keep all policy options on the table.
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