6-2! Pound Dives On Dovish BoE Vote Count, Growth Outlook Slashed

If this week’s 10Y gilt auction was any indication, no one was expecting any fireworks from the BoE, as demand was the strongest since 2013.

“Rates on hold, yield pickup to peers, steady currency — what’s not to like? Carpe diem,” Bloomberg’s Stephen Kirkland wrote earlier this morning.

It’s also worth noting that the pound got a (further) boost this morning on the back of PMI data (services and the composite prints) that came in ahead of expectations but still signaled a relative subdued pace of growth.

Pound

It’s the same story, really. “The economy is showing overall resilience in the face of concerns about the outlook,” Chris Williamson, chief business economist at IHS Markit. said, before cautioning that “risks to future growth remain firmly biased to the downside.”

Right. And there is of course Brexit to worry about.

“The PMI figures were quite good, the labor numbers were actually interesting, the details were O.K. but not amazing,” Ned Rumpeltin, head of currency strategy at Toronto Dominion Bank in London noted. “While the PMI numbers will be forgotten once the Bank of England has its say, at the margin there’s some hope that this will at least give a more positive spin to what the MPC may say although they’ve already made their decision.”

Basically the BoE is all about the vote today. If it’s 5-3, the pound could move sharply higher and it’s already sitting at a 11-month high:

GBPUSD

It’s worth noting that because the greenback is weak across the board (i.e. against everything else too), GBPUSD isn’t really saying much about the UK specifically.

Here’s a handy visual from Barclays:

GaugeBoE

And with that, the decision is out and the vote is 6-2:

  • BANK OF ENGLAND VOTES 6-2 TO MAINTAIN BENCHMARK INTEREST RATE
  • BANK OF ENGLAND MAINTAINS BENCHMARK INTEREST RATE AT 0.25%
  • BOE HOLDS CORPORATE BOND PLAN AT 10 BLN PNDS
  • BOE HOLDS ASSET PURCHASE PLAN AT 435 BLN PNDS
  • BANK OF ENGLAND KEEPS KEY INTEREST RATE AT 0.25%; VOTE 6-2

The knee-jerk is predictable – pound down:

Pound

More color:

  • BOE lowers growth forecast for this year to 1.7% from 1.9%; reduces 2018 projection to 1.6% from 1.7%; 2019 unchanged at 1.8%
  • Sees inflation at 2.8% in 2017, unchanged vs May; projections for 2018 at 2.5% vs 2.4% in May, 2019 unchanged at 2.2%
  • Lowers forecasts for wage growth in 2018 to 3% vs 3.5% in May; 2019 lowered to 3.25% vs 3.75% in May
  • BOE says if economy consistent with forecasts, monetary policy may need to be tightened “by a somewhat greater extent over the forecast period” than the market yield currently suggests
  • Market interest rates now suggest a 25bp increase by 3Q 2018, with another 25bp by 3Q 2020
  • MPC as a whole says “some tightening of monetary policy would be required to achieve a sustainable return of inflation to the target”
  • Reiterates that any increases are expected to come “at a gradual pace and to a limited extent”
  • BOE decides that Term Funding Scheme drawdowns to close on Feb. 28, as originally planned
  • Keeps asset purchases unchanged

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