Heading into the September BoE meeting investors want to know whether the latest global markets selloff and weak commodity prices have changed the bank’s policy outlook. In addition, the minutes will provide an important update of the BoE’s thinking about the domestic economy given that the real economic and trade data weakened most recently.
The GBP-bulls worry that mounting evidence of growth slowdown both abroad and at home as well as lingering risks to the inflation outlook may force the MPC members to adopt a more cautious view. Credit Agricole thinks that such concerns are premature.
The MPC will likely continue to monitor closely the latest developments on the global markets but contrast them with improving core CPI inflation, buoyant lending growth, and still very resilient labour market data and house prices at home. The bank also thinks that the 3% drop in GBP TWI from August could make the BoE less sensitive to the latest correction lower in commodity prices or the disappointing trade data of late.
In addition, the latest drop in the UK manufacturing production and exports could be partly explained by seasonal factors and need not portend a cyclical downturn in manufacturing. Indeed, still resilient domestic demand in both the US and the Eurozone – UK’s main trading partners – bodes well for the export outlook. Last but not least, the latest G20 communique as well as the series of measures to contain the market rout in China could boost MPC’s confidence that risk sentiment could consolidate.
All in all, Credit Agricole expects the BoE’s to keep its policy stance little changed from August with Ian McCafferty still voting for a hike. The outcome could help GBP extend its gains against EUR.