As expected, the BoE has indeed hiked for the first time in a decade.
- BANK OF ENGLAND RAISES BENCHMARK INTEREST RATE TO 0.5%
- BOE HOLDS CORPORATE BOND PLAN AT 10 BLN PNDS
- BOE HOLDS ASSET PURCHASE PLAN AT 435 BLN PNDS
- BANK OF ENGLAND VOTES 7-2 TO RAISE BENCHMARK INTEREST RATE
Notably, the bank removed the line that the key rate may need to rise more than markets currently anticipate. Here are the other key bullet points:
- Bank of England says Cunliffe, Ramsden dissented on vote, favored no change
- BOE drops line that key rate may need to rise more than markets currently anticipate. It had featured in recent statements
- BOE says potential growth has dropped because of weak productivity
- Says slack limited, spare capacity being eroded faster than anticipated
- BOE forecasts broadly unchanged vs Aug., see CPI at 2.2% at 3-yr horizon
- Bank projections based on two more hikes priced in, taking key rate to 1% in 2020
- BOE says future rate increases will be limited and gradual
- BOE sees ‘considerable risks’ to outlook from Brexit
On a quick read, this looks pretty dovish to me, and the market is treating it as such with the pound falling and the FTSE rising:
Earlier (full preview, background and analysis)
Ok, it’s BoE time, and don’t forget, we’re looking for a hike here. It would be the first in a decade.
This is interesting for all kinds of reasons not the least of which is that Brexit is cutting both ways, creating the type of uncertainty that you typically would not associate with tightening, but also helping to push up inflation to its highest since 2012, effectively forcing the BoE’s hand:
Given the messaging we’ve gotten lately, they’re pot committed to a hike lest they should lose credibility. A slightly hotter than expected GDP print last week (which was over- interpreted as traders looked for confirmation bias) only served to cement today’s decision. Here’s some context:
And here’s Goldman:
BoE likely to signal “gradual” and “limited” hikes. We expect the BoE to raise Bank Rate by 25bp today. We also expect the Bank to reiterate that future rate rises will be “gradual” and “limited”, and for Governor Carney to refuse to be drawn on the precise timing of the next rate rise. While we think the second rate increase will not come until 2018Q4, it is uncertain whether the MPC will signal “one and done” at this meeting. We continue to hold a negative view on Sterling, but a message today that is hawkish relative to expectations may present near-term upside risk.
For their part, BofAML thinks this is probably a mistake. To wit:
This week’s 0.4% qoq first estimate of Q3 GDP left the door open for the BoE to hike at next week’s meeting in our view. This does not mean we think the Bank of England (BoE) ‘should’ hike rates on 2 November, when they also publish their latest Inflation Report forecasts. We only reluctantly changed our call from them staying on hold after several rate setters reiterated their September guidance that a hike was coming. In our view the case for hiking now is weaker than before any of the previous hiking cycles since BoE independence.
Maybe we are over-interpreting. It is not the BoE’s job to tell the market it is right or wrong of course. But that is precisely what the BoE did in the September policy meeting minutes: seemingly in response to the market ignoring the BoE saying the market was wrong in August. As a result of that an over 80% chance of a November hike is now priced, which the BoE has not attempted to correct despite having ample time. The BoE faces a meaningful credibility risk, we think, if it does not follow through this time.
With GDP out of the way, there is little to stop the BoE hiking given their communication so far. They have some technical wiggle room (‘coming months’ ‘if the economy continues on the track’) and we would advise never say never with the BoE. But no hike looks like a slim possibility now.
“We expect the BoE to deliver a 25bp rate hike and dispel expectations of a one-and-done hike,” Barclays muses, adding the obvious: “we expect GBP to appreciate as a result.”
Meanwhile, this probably isn’t great for UK equities, especially at a time when Brexit still lingers over risk assets like fog over London. For more on that, we go to Bloomberg’s Heather Burke:
If the BOE is headed for a hiking cycle, the resulting increase in gilt yields could also derail gains in the FTSE 100. At the moment, the U.K. equity index is negatively correlated with bond yields and that relationship has been growing stronger. It suggests stocks as well as bonds have misgivings about the BOE raising rates amid negative real wages and Brexit uncertainty. Analysts are currently looking for 10-year gilt yields to rise slightly through year-end to 1.37 percent, vs 1.34 percent now. The average 4Q 2017 forecast for the FTSE 100 as of Oct. 18 was 7,450, below where it is today.
The U.K. typically underperforms global equities in a “regime of rising rates,” given that it is the highest dividend yielding market in the world, according to JPMorgan equity strategists led by Mislav Matejka. They point to a “challenging Growth-Policy tradeoff phase,” as indicators such as PMI and retail sales soften but the BOE looks set to tighten given higher inflation.
So that’s the setup here. We’ll leave you with a bit more from Tanvir Sandhu with his take on the rates side of the equation:
The BOE meeting may not prove kind to traders positioning for a one-and-done interest rate hike.
- The central bank needs to maintain its hard-won control in the rates market. After the BOE expressed a greater urgency for a rise at its last meeting, the central bank’s credibility will take a hit if it fails to hike
- The market prices a more than 90% probability of a 25 basis-point increase today, with a subsequent hike seen in September 2018 and three in total by 2020. Prior to the June meeting, no rate moves were priced until 2020. So the BOE’s forward guidance belatedly helped it gain control over the forward curve
- The U.K. swaps curve is suggesting the market views the BOE’s terminal rate at about 1%. That appears low given one of the main justifications for a hike is the persistence of above-target inflation
- Market pricing may be validated if the MPC delivers an increase and offers no new guidance, which may see a relief bull-flattening of the curve (particularly under a 5-4 vote). And a so-called dovish hike may see real yields move lower in the belly of the curve. But the selloff in gilts after September’s meeting showed what a more- hawkish-than-expected outcome can do
- To be sure, there are many factors that define the rate-hike cycle. Unsecured credit conditions have tightened while the MPC’s Term Funding Scheme ends in February, adding uncertainty for the outlook and damping the odds of a second increase in the first quarter
- And with domestic pressures — wage growth, productivity growth, unit labor cost — contained and Brexit-related FX-weakness having passed through to prices faster than expected, inflation next year will likely return to target in the first half
- Low-delta options on sterling-denominated assets may be attractive given the fragility of Brexit negotiations and the many possible outcomes that exist
- So yes, there are definitely factors that weigh against a more hawkish tilt. But after fighting so hard to buy itself some optionality by making clear that the policy reaction function won’t be restrained by Brexit uncertainty, the BOE isn’t going to give it away for free. “One-and-done” is unlikely to be the trading narrative that comes out of today’s meeting
