Markets plunged this week, partly on fears easy money is ending, and on Thursday investors get a chance to hear from one of the architects behind the decade of ultraloose monetary policy: The Bank of England.
As the first major central bank to speak out after the market rout, investors are looking for any hints the turmoil will change the bank’s rate outlook and make the policy makers more dovish. The U.K. central bank will release both its quarterly inflation report and rate decision on so-called “Super Thursday,” providing a deeper-than-usual insight into its thinking.
Read: Here’s how the stock market typically performs in the aftermath of a major rout
Virtually no one expects the Bank of England to change rates this week. Instead, analysts are looking for signals that Gov. Mark Carney and company are preparing to tighten policy in May when there should be more clarity on Brexit. Ahead of the stock market plunge this week, traders were pricing in a 60% chance of a rate rise in May, and while they have pared those expectations in recent days they still assign a more than 50% probability of a spring lift off, according to Bloomberg data.
In that light, traders should look for three signals—a boost in economic growth and inflation forecasts, fewer dissents, and comments on market expectations—that a hike is coming in May, according to Kallum Pickering, senior U.K. economist at Berenberg.
1. Upgrade to forecasts
As part of the quarterly inflation report, the bank will release its new forecasts on inflation and economic growth. Being an inflation-targeting central bank, these forecasts work as the most important forward guidance to the market, Pickering said. If Carney wants to prime investors for tighter policy, he can lift the outlooks because it would signal a need for higher interest rates to rein in rising inflation.
At the bank’s “Super Thursday” in November, it hinted that economic growth above 1.5% would spark a rally in consumer prices that would be intolerable to the policy makers.
“The BOE could thus raise its economic forecast further above this ‘speed limit’, while projecting that inflation will remain above the 2% target for the forecast horizon, and that the labor market will remain above the BOE’s estimate of full employment,” Pickering said.
U.K. inflation currently stands at 3%, down from its more than five-year high of 3.1% in November, but still way above the BOE’s 2% target. In the November inflation report, the bank’s forecast showed inflation is likely to stay above the target until at least 2020.
2. Dissenting members
In November, the BOE raised rates for the first time in a decade, taking the benchmark rate to 0.5% from a record low of 0.25%. In the months ahead of the tightening, the number of Monetary Policy Committee members voting for a rise increased, helping build up market expectations for the November move.
The bank could use the same strategy this time to prepare for a May rise, Pickering said. At least two members—Ian McCafferty and Michael Saunders—are likely candidates to jump into the hawkish camp, he said.
3. Market expectations
The bank has previously told off the market for being too dovish in its outlook. In September last year, the MPC said investors didn’t fully appreciate that rates could rise “over the coming months” and that “policy could need to be tightened by a somewhat greater extent over the forecast period than current market expectations.”
The policy makers could once again directly comment on the market pricing if they find traders are too complacent about the rate outlook, Pickering said.
Berenberg expects two rate rises in 2018, one in May and another in November.
“It is getting harder and harder for the BOE to justify its easy policy stance over time. Latest data shows an improving economy,” Pickering said. “Without rate hikes, the headline inflation rate will not fall from its current rate of 3% to the BOE’s 2% target within the BOE’s preferred policy horizon (around two years).”
The BOE’s rate decision, meeting minutes and inflation report are due at noon London time, or 7 a.m. Eastern Time on Thursday. Carney will hold a news conference at 12:30 p.m. London time.