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  • Interest Rate Should Remain  Unchanged At 0.1%
  • Uncertainties on Delta Variant and Higher Inflation Should Mean Economic Support to Continue.
  • BOE expected to give some guidance on balance sheet reduction plans

The Bank of England (BOE) is expected to announce its interest rate decision tomorrow Thursday 5 August. Although there have been some indications that the economy is not opening that fast after July 19 ‘Freedom Day’ in the UK, the BOE is widely expected to leave the rate unchanged at 0.1%.

However, there are several implications that one must take into account before the actual decision. The market is closely watching the BOE’s monetary policy statement on inflation which is once again rearing its head. There are also strong indications that the Bank of England will begin tapering its bond purchases as the economy continues to re-open.

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Bank of England rate decision: Will overall dove/hawkish split change from June?

All investor and market analyst eyes are currently on the BOE decision and if there will be a doveish/hawkish split like last time. This should have an effect on the GBP/USD rate which is likely to continue strengthening if the interest rate remains unchanged. With all the Brexit wars still in full swing especially over Northern Ireland, the impact on the EUR/GBP rate could also be substantial.

The Bank of England is certainly not expecting to taper back its bond buying program anytime soon though. According to ING analysts, James Smith and Antoine Bouvent, it is highly unlikely that there will be any hawkish movement by the BOE on ending economic support early.

“The recent rise in Covid-19 uncertainty means we’re unlikely to see a hawkish turn from the Bank of England on Thursday. We expect policymakers to avoid offering any new hints on when the first rate hike may come, and we also doubt we’ll get the early end to QE that some BoE hawks have recently proposed”, Smith and Bouvent said.

The general thought is that the interest rate threshold is expected to be cut to 1.5% which would also push tapering well into the future.

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First Rate Hike Expected In Early 2023

The general consensus is that the first interest rate hike will not be happening before early 2023. Additionally, it is unlikely that there well be any hawkish movement in the Aug 5 meeting. Doves seem to be gaining the upper hand here.

“We expect the Bank of England to strike a cautiously optimistic note on Thursday (5 August) – though crucially we’re unlikely to get any fresh hints on the possible timing of future hikes. Nor are we likely to see an early end to the Bank’s QE programme – something BoE hawk Michael Saunders has recently advocated”, the ING analysts added.

Smith and Bouvent have indicated that they’re expecting to hear more about the bank’s future balance sheet reduction plans though. These are quite likely to occur at a much earlier point in the future as the economy continues to re-open at a faster level. They confirmed their expectations of a rate hike in early 2023.

Conclusion: Bank Of England Should Keep Rate in Place But Remains Doveish On Economic Support

There is a general consensus that the BOE interest rate will remain at 0.1% as it has been for the last few quarters. What we do expect however is some more guidance on the bond purchase tapering although the recent resurgence of the Delta variant has pushed plans into slight disarray.

The BOE is expected to raise its inflation forecast considerably for the rest of the year. There have been significant price spikes related to re-opening in several consumer services. These are combined with sme supply chain disruption as well as energy base effects. Economists are expecting CPI to peak at 3.5% which is substantially more than the 2.5% that the Bank Of England had pencilled in back in May.

Higher inflation would definitely kick the ending of economic support into the long grass for a while.

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