With sterling holding steady against the greenback on Tuesday, traders will comb the minutes from the Bank of England’s (BoE) latest rate-setting policy committee meeting for clues about a potential rate hike schedule on Wednesday.
Most market analysts expect dovish overtones to prevail despite two of the nine members of the Monetary Policy Committee (MPC) voting for a rate rise last month. It’s a sensible assumption in an uncertain global economic environment exacerbated by a slowdown in China and the eurozone’s faltering fortunes, as choppy market conditions are the order of the day.
Doves Expected to Fly
The BoE’s MPC last met on October 9 and announced there would be no change in the benchmark rate of 0.5% or the size of the bank’s bond-purchase program of £375 billion. The last time the minutes were released, they shed light on the dissent from two members who were in favor of raising rates by 25 basis points, but they were outvoted. If the October minutes show similar dissent, it would be the third time that the MPC has not been unanimous in its vote.
Economic conditions have not improved, and in fact they have worsened in some parts of the world, so it came as no surprise that the BoE did not change its monetary policy. The majority of the MPC is concerned with European growth and comments from the BoE’s Chief Economist last week are probably telling of the more downbeat reading of the U.K. economy. Andrew Haldane said he was “gloomier” with the direct implication that rates would remain lower for longer.
The U.S. Federal Reserve and the BoE are the two major central banks currently sharing the lead on expected interest rate hikes. Not too long ago it was the Old Lady alone that had investors guessing as to when a rate hike would be announced. Governor Mark Carney has turned dovish recently, influenced by global economic weakness, low inflation in the U.K., and the eurozone’s abysmal economy.
The comments from policymakers and the global slowdown have reduced the appeal of the GBP. The USD has been the strongest currency this year. As if to prove that it’s not easy being No. 1, the USD ran into a wall when American retail sales figures disappointed, in turn triggering a global selloff. The USD has recovered some of the ground it lost on the month and remains net positive versus the majors year-to-date.
Events Justify Canadian Caution
In the low-for-longer environment that major central banks are caught in, it will be no surprise if the Bank of Canada (BoC) holds rates at 1.00% as it has done since September 2010. This has been the longest period without a rate change in Canada since the 1950s. Canadian fundamentals have strengthened but so far do not justify a rate hike and the central bank has been vocal about this fact.
The BoC’s rate decision will be accompanied by the release of the bank’s quarterly Monetary Policy Report. This document will update the projections of the BOC on the Canadian economy and other major economic trends. The current environment poses major risks for Canadian growth. An oversupply of oil and a slowdown in major markets has brought the price of crude down, punishing all major exporters like Canada.
The U.S. retail sales scare has barely been patched over with positive U.S. data, but the risk remains that the American economic revival might be short-lived. Europe and Japan continue to stagnate as their institutions have not deployed much-needed rounds of stimulus.
BoC Governor Stephen Poloz will face the press after the rate announcement on Wednesday and it’s expected he will continue to preach caution as more “serial disappointment” has come to the fore.
Next week the Fed will end its bond-buying program that was designed to stimulate the economy and jumpstart a recovery after the 2008 financial crisis. The BoC and the BoE are candidates to follow in the Fed’s footsteps, but it remains to be seen when Chair Janet Yellen will initiate a rate hike. Some analyst estimates hint it could end up being late 2015 as per the majority of policy member statements.
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