The main event of the day is the start of a new era at the Bank of England. Until now, at the conclusion of the MPC meeting, the decision would be announced, but no press conference was typically held. A few weeks later the minutes would be released, and the vote revealed. Starting today, the minutes will be released simultaneously with the decision. Also today, at the same time, the Bank of England will release its inflation report, which contains it economic forecasts Less than an hour later Governor Carney will hold a press conference.
If that is the procedure, what is the substance? There are two details on which investors will focus. First is the vote. As many as three dissents are likely in favor of higher rates. A dissent by Miles, however, will immediately be discounted as it is his last meeting, and his replacement, through his academic work, may be somewhat less hawkish. The second issue is the BOE's inflation forecasts. It is expected to be at the 2% target in two years. The three-year forecast is understood to be the policy signal.The BOE has to balance a number of cross currents, including sterling's appreciation, oil, wages, capacity constraints, and the real estate market.
Depending on which market one is looking at, investors appear to be anticipating the first BOE rate hike in Q2 16. However, it appears to be about a 1 in 3 chance of a hike as soon as Q4 15. We are skeptical of a rate hike this year. We note that this will not be the first time that the hawks on the MPC want to raise rates. Sterling's strength on a trade-weighted basis is already tightening monetary conditions. The yield on the 2-year gilt is up 20 bp this year, the most among the G7 countries. The FTSE is up 2.5% year-to-date, making it easily the worst performing market among the major European bourses.
Earlier today, and overshadowed by the pending BOE flurry, the UK reported an unexpected decline in June industrial output. The 0.4% decline compares with expectations of a small rise. The May data were trimmed as well. This means that industrial output rose 0.7% in Q2, not 1.0% that had been assumed by the preliminary estimate of Q2 GDP.
