Monetary-Policy Meeting at the Bank of England

Current interest rate: 5%

In favour of unchanged interest rates:

• The inflation risk is on the upside
• There has been less focus on the financial turbulence this past month
• The Bank of England (BoE) has announced that the worst is over

In favour of a 25 bp cut:

• The housing market is softening
• Growth indicators are pointing downwards

Market expectation: no change

Jyske Bank's expectation: no change

The decision in May about interest rates will rest on new estimates by the BoE of growth and inflation, which will be announced in connection with the inflation report. The inflation report will not be released until 14 May. When rates remain unchanged, the BoE usually does not attach any comments to its interest rate announcement, and in that case we must wait until later to learn details about the meeting.

At the latest monetary-policy meeting, the decision was far from unanimous, since six MPC members voted in favour of a cut of 0.25 percentage point, two voted in favour of leaving interest rates unchanged, and David Blanchflower voted in favour of a cut of 0.50 percentage point. Still, Mr Blanchflower is normally doveish, so this should not necessarily cause concern.

Also this time the BoE has to choose one of two evils - lower economic growth or rising inflation (see the chart below). Since the latest monetary- policy meeting, the financial turbulence has subsided a little, and according to the BoE, the worst is over. However, the housing market is still softening, and the growth indicators are still pointing downwards. Today (Tuesday) PMI Service showed a fall to 50.4 in April from 52.1 in March. The index of purchasing prices, on the other hand, is historically high, so our economists expect the BoE to lower interest rates gradually. Our macroeconomists expect the BoE to refrain from lowering interest rates this month, but to make cuts in June and August. Market prices currently discount 8 bp for an interest rate cut on Thursday, but it should be added that rates have fallen by 22 bp over the past fortnight across the curve on fears caused by the black clouds hanging over the British economy in general and the housing market in particular.

GBP has strengthened over the past two weeks while the financial turbulence subsided after last week's heavy macroeconomic data from the US and the slightly weaker indicators from the euro zone. Technically, EUR/GBP has found support at around the 55-day MA, which comes in at around 78.10. Also the momentum indicators are pointing downwards for GBP, so although we expect interest rates to be left unchanged on Thursday, we regard risk for GBP to be on the downside.

Jyske Markets - FX Research
http://www.jyskebank.dk/finansnyt

The analysis is based on information which Jyske Bank finds reliable, but Jyske Bank does not assume any responsibility for the correctness of the material nor for transactions made on the basis of the information or the estimates of the analysis. The estimates and recommendation of the analysis may be changed without notice. The analysis is for personal use of Jyske Bank's customers and may not be copied.