The consensus opinion in the financial markets regarding the eventual normalization of monetary policy has been that the Bank of England will be the next central bank to increase its benchmark interest rates after the Federal Reserve does so, likely sometime this autumn.
This conventional wisdom will be tested, however, when the BoE releases a slew of important data on Thursday, a momentous event now being dubbed "Super Thursday." Traders on both sides of the Atlantic (and around the world, for that matter) will be watching closely as the bank releases vital information about the direction of monetary policy in the U.K., including the minutes from the most recent meeting of the bank's Monetary Policy Committee, the voting breakdown of the committee's 9 members, as well as an updated inflation report.
The Importance of Super Thursday
Some are comparing the centrality of Thursday's "bumper release" in the U.K. to the all-important non-farm payrolls reports that typically move markets in the U.S. Not only is the report expected to spark some volatile trading of the pound sterling on the forex markets, but the BoE plans on making these information-heavy reports a regular feature in its forward guidance, hence the comparisons to the non-farm payrolls that are released every month. The sterling has been one of the globe's best-performing currencies, advancing against the dollar and especially the euro this year. For perspective, the sterling is trading above $1.56, meaning the currency has more than 50% more purchasing power than the Greenback even amid the long bull run for the dollar.
What the Experts are Expecting
Multiple sources with firsthand experience at the Bank of England have expressed their belief that the central bank will move closer toward raising its own rates sometime in the fall (November seems to be the target date), irrespective of what the inflation numbers indicate. Former Monetary Policy Committee member Sushil Wadhwani pointed out that inflation will remain far below target levels so long as the downward slide for commodities remains firmly in place. With this consideration, inflation may not even be an overriding concern for central banks in their decision about when benchmark rates will increase. More importance will be placed on whether or not the Chinese markets can avoid a "hard landing" from its recent stock market shock.
A recurring theme, characterized as weening off of "monetary medicine," has been that unless the Bank of England (and certainly the Federal Reserve) move on interest rates soon, especially while the economies of the U.S. and Britain have been rather steady, then these central banks won't have any policy tools to turn to the next time that the global markets hit a rut. Gradually normalizing what are undoubtedly extreme measures (i.e. near-zero interest rates) is crucial to putting the banks back in a position to deal with future (inevitable) economic downturns.
Although still shrouded in ambiguity, the Fed is expected to increase the federal funds rate in 25-basis-point increments when the time comes. Meanwhile, most expect that the BoE will opt for a more shallow approach, perhaps making its first rate hike just 0.10% (10 basis points). Whatever the bank decides, the "Super Thursday" event may become a fixture in the constant endeavor to decipher the future direction of key monetary policies.