Janus Henderson: Is Mark Carney an unreliable boyfriend?

While macro fundamentals suggest that the case for a UK interest rate hike remains finely balanced, recent comments from members of the Bank of England (BoE)'s MPC have been widely interpreted as signalling that rates will rise on Thursday, for the first time in ten years. Financial markets are pricing in the likelihood of a 25 basis points (bps) hike at nearly 90%.

If rates are increased, as expected, market focus will shift to determining whether this is a one-off reversal of last summer’s rate cut or the start of a tightening cycle. The composition of the MPC members’ votes will be seen as one indicator of the bank’s view. The consensus expectation is for a 7-2 vote in favour of higher rates. The BoE’s new economic projections, which will also be released on Thursday, will give further clues. Attention here will focus on the longevity of the projected inflation overshoot above the bank’s 2% target and the implied need for additional monetary tightening. Beyond this, the language of the statement will be finely scrutinised for any guidance about the future path of interest rates.

Going into the vote, markets are priced for another 25bps rise by August 2018 and a 50% probability of another such hike by March 2019. This saucer-shaped trajectory is in line with recent verbal guidance from the MPC that rate rises would be expected to be “at a gradual pace and to a limited extent”. With a hike almost fully priced in, the market impact of a rate rise will depend on the extent to which the bank’s overall message causes investors to reappraise these expectations.

If the MPC defies market expectations and leaves interest rates unchanged on Thursday, sterling is likely to weaken and references to BoE Governor Mark Carney as being “an unreliable boyfriend” are likely to re-emerge.