Bank Of England Adopts Cautious Tone In Unanimous Rate Decision Amid Rising Inflation

First, a little context here for readers who might not keep tabs on what’s going on in the UK.

UK inflation is sitting at 3.1%, the highest in nearly six years and that means it’s time for Mark Carney to brush up on his letter writing skills. He’ll need to pen an explanation as to why the BoE is overshooting their target and deliver it to Chancellor of the Exchequer Philip Hammond. Because the data came in while the MPC was already meeting for December, that letter won’t be published until the February decision.

One thing worth noting is that the uptick in November stemmed from plane tickets and video games (really) and slowing food and non-energy industrial goods costs seem to suggest that the pass-through effect from the pound’s Brexit-related weakness may be dissipating. Still, this is something you need to be aware of when you think about Thursday’s BoE decision. Additionally, you should note that one side effect of this is negative real wage growth. Basic wages are growing at the fastest annual pace since January but are still well behind inflation and that disparity has the potential to weigh on the broader economy. Wage growth has lagged inflation since March.

This of course comes amid Brexit uncertainty and after last month’s hike – the first in a decade. It was taken by the market as being of the “dovish” variety thus the sharp knee-jerk lower in the pound:

GBPUSD

So that’s the setup for the BoE decision and although it will be unanimous (no change), the focus will be on the minutes and whether there are still concerns about jumping the gun on tightening. “Mixed progress on the first phase of Brexit negotiations has led to some Sterling volatility, with trade-weighted Sterling strengthening less than 1% since the November Inflation Report [and] expectations for future rate rises have also been brought forward a little” Goldman notes, adding that “since the BoE’s economic outlook assumes a transitional deal is agreed, progress on Brexit negotiations is unlikely to change the BoE’s guidance that two further rate rises are needed over the next three years to return inflation to target sustainably.”

“While U.K. money markets have hardly budged since the last policy meeting — pricing the next rate hike for November 2018 — there’s room for that to move in either direction, depending on today’s interest-rates decision and BOE minutes,” Bloomberg’s Stephen Kirkland wrote this morning, adding that “data yesterday showing declines in employment and the participation rate may indicate cracks in the labor market that could push the next hike out to 2019.”

So there’s that and here’s the decision:

  • BANK OF ENGLAND VOTES UNANIMOUSLY TO MAINTAIN BENCHMARK INTEREST RATE
  • BOE HOLDS ASSET PURCHASE PLAN AT 435 BLN PNDS

And some more:

  • Bank of England says that some modest tightening may be needed in next few years
  • Sees gradual buildup of domestic price pressures
  • Says U.K. Budget may lessen drag on GDP
  • Says Brexit progress could boost consumer, business confidence
  • Also notes recent economic indicators have been softer than expected

That sounds pretty dovish – or at least “careful” – to me.

And here’s the knee-jerk in the pound:

GBPUSD

 

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