Bank of England to hold its fire after August’s Brexit bazooka

LONDON (Reuters) – The Bank of England holds a monetary policy meeting on Thursday as more hard economic numbers trickle in following June’s Brexit shock, while US data and a speech by policymaker Lael Brainard will give Fed-watchers food for thought.

Data and surveys in the coming week will also give a steer on price and industry trends in the euro zone after the European Central Bank disappointed market expectations that it would announce an extension of its asset purchase program.

Speaking to lawmakers on Sept. 7, Governor Mark Carney defended the BoE’s big August stimulus package but said initial damage to the economy from Britain’s June 23 vote to leave the European Union looked less severe than the Bank had forecast.

While some critics of the BoE have suggested August’s decision to cut interest rates to a record low 0.25 percent, restart asset purchases and ease lending by giving cheap loans to banks was too aggressive, the Bank is expected to cut rates again later this year but leave policy unchanged this month.

“We see next Thursday as being too soon for further action and expect the BoE to maintain Bank Rate at 0.25% and the level of QE (asset purchases) at 435 billion pounds ($578.5 billion),” Investec economists said.

“Our central case continues to be for another 15 basis point cut in Bank Rate to 0.10% at the November meeting.”

Official figures, including inflation on Tuesday, unemployment on Wednesday and retail sales on Thursday, should give a clearer picture of how companies and consumers are responding to the Brexit vote after purchasing manager surveys showed activity bouncing back last month.

Economists polled by Reuters forecast consumer prices will be 0.7% higher in August compared with a year ago, edging up from 0.6 percent in July, which was the biggest annual rise since the end of 2014. But sterling’s tumble since the Brexit vote means inflation is expected to rise strongly soon.

The unemployment rate for the three months to July is forecast to stay at 4.9% – an almost 11-year low – while the number of people claiming jobless benefits in August is seen rising after a surprise fall in July.

Monthly retail sales are predicted to have fallen in August after a jump in July, when consumers showed no immediate alarm at the Brexit vote.

European Union leaders will meanwhile gather on Friday – without British Prime Minister Theresa May – to discuss Brexit and other issues.

Thursday’s euro zone CPI release is expected to show annual inflation was 0.2% in August, in line with the new 2016 forecast the ECB gave on Sept. 8.

The sharpest drop in German industrial output for nearly two years may presage a fall in the July figure for the euro zone, due on Wednesday, although recent purchasing manager surveys have pointed to continued modest growth in manufacturing in the third quarter.

Euro zone trade and employment data will also be released this week, as well the ZEW survey of economic sentiment in Germany, the currency bloc’s economic engine.

Swiss National Bank policymakers also meet on Thursday, with no change to policy expected.

Expectations the Fed will raise interest rates again in September have cooled after job creation eased and survey data pointed to only lackluster third quarter growth but some policymakers still favor a hike soon.

Given the US central bank’s insistence that its next move will be data-dependent, the coming week’s inflation, industrial production and retail sales numbers could help shift the dial.

July US annual consumer price inflation was 0.8%, down from 1.0% in June and a tame reading for August, due on Friday, would encourage a deferral.

August retail sales figures on Thursday could show some impact from last month’s floods in Louisiana, while Friday’s University of Michigan survey will also gauge sentiment among US consumers.

Markets are eyeing keenly the speech by Brainard on Monday, just before the blackout period starts for Fed officials before the Sept. 20-21 policy meeting. She is seen as one of the FOMC’s more dovish members, so any hint of a more aggressive stance could see rate hike bets being put back on.

“Monday may be a very important day,” Morgan Stanley’s head of European FX research, Hans Redeker, said on Friday.

“If the Fed wants to prepare the market (for a hike) then a generally dovish member of the FOMC like Brainard making hawkish statements would be an obvious way.”