Carney’s Final BOE Rate Call Is a Knife Edge: Decision Day Guide

(Bloomberg) --

Bank of England Governor Mark Carney’s final interest-rate decision has economists and traders split over whether they’ll get the first cut since 2016.

Carney unleashed fireworks this month when he said the Monetary Policy Committee has ample space to ease if needed, and some of his colleagues have signaled they’re almost ready to use it. Yet the signs are that Prime Minister Boris Johnson’s decisive election victory is lifting confidence, and his plans to boost spending should also bolster the economy. That may be reason to wait.

Vote Split

Traders see about a 52% chance of a cut on Thursday, the most divided they’ve ever been this close to a decision under Carney. Bets climbed as high as 70% in the weeks before the announcement, before paring back in the last few days.

A Bloomberg survey of economists predicts five different results for the vote split among the nine policy makers. They lean toward a 6-3 vote to hold, with Michael Saunders and Jonathan Haskel repeating their calls for lower rates, and Gertjan Vlieghe joining the dissent.

Goldman Sachs, HSBC and Morgan Stanley are among the banks calling for no change, while Deutsche Bank, Barclays and Natwest predict a cut.

Economic Outlook

Critical for the decision will be updated predictions for the economy. If inflation is seen at around 2% in two years time, that suggests officials endorse current market pricing that sees a rate cut as coming -- at least by August if not immediately. The outlook for GDP could tip the balance.

Equally important will be whether the MPC keeps, tweaks or drops its view that “limited and gradual” rate hikes are coming.

Surveys -- the most up-to-date view of the economy -- suggest that confidence is roaring back now that Johnson has a solid mandate to push through the U.K.’s exit from the European Union and ramp up spending. Traders paid particular attention to a Confederation of British Industry gauge that showed the biggest surge in confidence among manufacturers on record. A Lloyds’s measure of business sentiment published Thursday indicates economic optimism jumped to an 18-month high.

Hard data, much of which dates back to before the election, has been less impressive. Inflation is the weakest in three years, and British consumers shunned stores during the December holiday period. The economy unexpectedly shrank in November, casting doubt over whether there was any growth at all in the fourth quarter. Still, the jobs market has remained robust.

The bank will also publish its updated assumptions about the economy’s productive capacity. The amount of slack, or lack of it, at companies is a key factor in deciding whether policy needs to be tightened or loosened.

What Bloomberg’s Economists Say...

“The small clutch of data we’ve had since the Dec. 12 general election suggests growth will gather pace this year while looser fiscal policy will be highly supportive. That should be enough to keep rates steady in January.”

-Dan Hanson. Read his BOE PREVIEW

Secret Agents

Some vital insights will be kept under wraps until the Monetary Policy Report is released. Feedback from BOE agents -- a cross-country network that holds confidential conversations with businesses and community organizations -- is regularly cited by policy makers, and a member of the network typically briefs the MPC before its vote.

The findings of the central bank’s Decision Maker Panel, a survey of chief financial officers on issues from uncertainty and headcount to price expectations, may also count. A summary of the January findings will be published at 2 p.m.

To contact the reporter on this story: Lucy Meakin in London at lmeakin1@bloomberg.net

To contact the editors responsible for this story: Paul Gordon at pgordon6@bloomberg.net, Brian Swint

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