While the BOE kept rates unchanged at 0.5% as expected, the market was surprised by both the hawkish undertones of the statement and the surprising addition of Haldane to the list of dissenters (McCafferty and Saunders), which made the decision a 6-3 affair when markets were expected a 7-2 split.
The flip by BoE Chief Economist Haldane was surprising due to his recent vote for a hold; as a result, odds of a rate hike in August, when the BOE will publish new estimates, have been sharply boosted, which is in turn reflected in cable, which has surged nearly 100 pips rising above 1.32 in kneejerk reaction.
There were no surprises in the other aspects of the decision:
- The vote split on corporate bonds: 9-0 in favour of maintaining the current stock of corporate bonds at GBP 10bln
- The vote split on APF: 9-0 in favour of maintaining the current stock of UK government bond purchases at GBP 435bln
Adding to the hawkish undertone, the BoE said it now intends not to reduce its balance sheet until Bank Rate reached around 1.50% (the previous guidance around 2.00%), although it added that “in the event that potential movements in Bank Rate are judged insufficient to achieve the inflation target, the reduction in the stock of assets could be amended or reversed”:
Since the previous guidance, the Committee has reduced Bank Rate from 0.5% to 0.25% in August 2016 and has noted that it could lower it further if required. Reflecting this, the MPC now intends not to reduce the stock of purchased assets until Bank Rate reaches around 1.5%, compared to the previous guidance of around 2%. Any reduction in the stock of purchased assets will be conducted at a gradual and predictable pace. Decisions on Bank Rate will take into account any impact of changes in the stock of purchased assets on overall monetary conditions, in order to achieve the inflation target.
Some other highlights courtesy of RanSquawk:
- Interest Rates: Best collective judgement remains that were the economy to develop broadly in line with the May projections, on ongoing tightening of monetary policy over the forecast period would be appropriate. Future increases in the Bank Rate are likely to be gradual and to a limited extent.
- Reinvestments: Any reduction in stock of asset purchases to be at a gradual and predictable pace.
- Global Protectionism/Trade: A major increase in protectionism worldwide could have a significant negative impact on global growth.
- Data: Judgements on growth made in May QIR (Q1 slowdown temporary, momentum recovering in Q2) appear “broadly on track”. Data released since the May QIR suggested downside risks that had been implied by a number of household sector indicators had dissipated.
- Inflation: Inflation is expected to pick up by slightly more than projected in the near term reflecting higher oil prices and weaker GBP.
- Growth: Bank staff continue to expect GDP growth of 0.4% in Q2, in line with the May report.
- Labor Market/Wages: Most indicators of pay growth have picked up & labour market remains tight, suggesting domestic cost pressures will continue to firm gradually.
- Slack: All members agreed that there is widespread evidence that slack was largely used up.
In kneejerk response to the unexpected 6-3 split, cable caught a bid with GBPUSD spiking from 1.3130 to 1.3200, EURGBP falling from 0.8780 to 0.8750, and Gilts Sep’18 dropping from 122.90 to 122.35.
Looking at rate hike odds, the August probability is now back over 60% from below 50% before the announcement, while November looks fully priced in, or as Bloomberg’s Stephen Kirkland writes, “looks like Carney et al wanted to put some binary risk back in the market after all as well as take the opportunity to normalize rates.”
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