UK: BoE Preview: Silence is golden – ING

Research Team at ING, suggests that as economic momentum stalls, the BoE’s challenge is to reflect near-term weakness in their forecasts without making a judgment on the referendum outcome.

Key Quotes

“Overall, a dovish MPC could see some pent-up GBP weakness emerge.

Loss of UK economic momentum has been sizable. All three PMI surveys released last week came in at their lowest levels since early 2013, implying that 2Q16 GDP growth might be the slowest since 2012. Uncertainty over the outcome of the EU referendum is surely playing a role, with firms reported to be delaying hiring/investment decisions until after the vote. Should the UK vote to remain in the EU, then we would expect activity to bounce back.

BoE faced with the tricky task of downgrading outlook whilst staying apolitical. Following the MPC’s warning last month that there might be “some softening” in 1H16 growth, we suspect the Bank’s 2Q GDP estimate will be revised lower in light of the soft data (INGF: 0.3% QoQ). Any dovish signals at today’s meeting are more likely to be expressed qualitatively.

Murmurings of a BoE rate cut today seem a bit wide of the mark. Speculation that some MPC members could vote for a rate cut at today’s meeting seems a bit premature and inconsistent with recent MPC talk. Unless the BoE has a strong reason to believe that the slowdown in activity is due to something more structural than Brexit-related uncertainties, then a rate cut at this juncture would in our view be wasteful of limited policy ammunition (in the event that the UK votes to leave the EU).

GBP brushed off the weak UK data in April; BoE meeting might be the catalyst for pent-up weakness to manifest. Despite a sequence of hefty negative surprises over the past month, we note that typically data-sensitive GBP pairs (eg, cable) have been remarkably dismissive of the weaker UK data. Our data surprise analysis shows that there could be around 1.5-2.0% worth of pent-up downside in cable due to the deterioration in the UK fundamental outlook; a more dovish MPC (ie, one that acknowledges the slowdown in activity) might see part of this GBP weakness transpire.”