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12/02/2015: Bank of England sharpens expectations of a rate hike

With the Bank of England having kept interest rates flat since early 2009, the Bank of England’s Quarterly Inflation Report (QIR) has become just as important for its guidance on monetary policy than the Monetary Policy Committee meeting minutes (and in many ways is even more important). Today’s press conference of the QIR has again given traders much to ponder and sterling has been a significant mover as a result.

Mark Carney

Mark Carney cut a fairly neutral figure in the press conference as he even talked at one stage of the Bank of England having the capacity to even engage further monetary easing (additional QE) should the forces of inflation (or should that be deflation). However, whilst the Bank needs to remain cautious (especially in front of a general election in May), especially on inflation, this could not hide the general slightly hawkish theme.

BoE fan charts

The Bank’s fan charts above show that expectations of inflation have been reduced since the November report (which would ordinarily be dovish), whilst the expectations of GDP growth have been strengthened (which is hawkish). However, the Bank also sees that the subdued growth in unit labour costs (predominantly wage growth) has picked up in the past two quarters which are running well above the four quarter average which is currently still below 2%. The Bank puts this down to narrowing slack in the labour market which is pushing wages higher and if this narrowing continues the growth in wages (and importantly real wage growth) will too. Mark Carney sees this that the “fall in the oil price in unambiguously good for the UK economy”.

The reaction has been generally positive on the Short Sterling Interest Rate futures (STIRs), with rates being drawn in slightly through the hawkish lean from the Bank of England. However looking at the March 2016 contract, the initial move lower (which suggests expectations being of future rate hikes being dragged forward) has been tempered slightly in the past few minutes. The chart below shows the price of March 2016 STIRs.

STIR   Mar 16

However, in the forex markets, sterling has strengthened throughout the morning and trades currently around the highs of the day. Up over 100 pips for the day, this means that Cable is looking to test the key near term resistance at $1.5350.  Not only that, if sterling can sustain the move then the old 7 month downtrend looks to finally be breaking. Momentum also continues to improve. If Cable can now confirm the rally above $1.5350 it would then start to improve the medium term outlook and a rally towards $1.5485 would be on.

Cable   12022015

The recovery in sterling is continuing, could the Bank of England have given traders the nudge they need to break above $1.5350. The signs are good.

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