The Bank of England has hiked interest rates by 25 basis points to 0.75%. That much was widely priced in, with interest rate futures markets pricing in around 80% to 90% probability of a hike today. However the Monetary Policy Committee was unanimous in the move which is a little surprising, whilst the MPC also slightly upgraded its growth forecasts. We look at the decision and the impact on markets.
With the hawkish noises in recent weeks, any decision by the Bank of England not to hike rates today would possibly have resulted in Mark Carney being dragged out of the press conference by the scruff of his neck and booted out the door on Threadneedle Street with a P45 in his back pocket. So with the rate hike, the Governor remains in his position. The decision came with the Quarterly Inflation report, which included the highlights below:
On the surface this could be regarded as a fairly standard hike, but the market does not seem to trust Carney (is this really a surprise?). The inflation report, and MPC statement for that matter, In the next 12 months there will be some considerable Brexit uncertainties. The November meeting is bang in the midst of a crucial time for Brexit negotiations, whilst February 2019 is prior to the withdrawal date. Forward rates (see below) are suggesting perhaps the next rate rise may not be for another 12 months and then perhaps another 12 months after that. So one per year. This is a painfully slow tightening (Carney: we have to walk not run) and clearly financial markets are very uncertain. BoE policy going forward is based on a smooth Brexit, something that is by no means convincing.
Also given that the global economy could well be rolling over around 2020, this would also suggest that the likelihood is that the Bank of England will get nowhere near its equilibrium rate before having to look towards tightening once more.
Given the political risks surrounding Brexit, this position could change but this is no real convergence with the Fed (which is hiking at 3 to 4 per year), whilst the reaction on EUR/GBP also suggests that even the ECB is positioning to exit its easy policy more decisively. This means that political risk now becomes a key driver of sterling going forward. This is not great for any prospective bulls of sterling in the coming months. Cable is likely to continue to fade rallies and testing $1.2700/$1.2800 seems to be the risk now.
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