It was billed as “knife-edge” call, but the BoE kept rates on hold Thursday, disappointing those who bet policymakers would heed the purported warning from underwhelming inflation data and lackluster retail sales (for example) in weighing whether to move at Mark Carney’s final meeting.
The market had it at a coin flip headed in.
The vote was 7-2. Sterling jumped, but depending on how things evolve over the next few hours (and once everyone remembers that negotiating a trade deal with Brussels before the end of 2020 is a tall order), it could give back the knee-jerk.
The pound had fallen for five straight days headed in. Amusingly, overnight volatility in sterling was actually below levels seen prior to the December meeting.
Earlier this month, a disastrous retail sales report appeared to end the debate on whether there was or wasn’t a “Boris bounce” for the UK economy following the landslide Conservative victory in December. Data showed retail sales have been either flat or fallen for five straight months. That is the worst streak since 1996. The news came on the heels of terribly disappointing inflation data.
And yet, a week later, robust PMIs argued that the “Boris bounce” lived, casting considerable doubt on whether the BoE would, in fact, follow through on recent dovish rhetoric at the bank’s January meeting.
Gilts fell, short sterling bear flattened and UK stocks extended losses following the decision.
If this ends up looking misguided in retrospect, there are going to be serious questions about the relative wisdom of relying in part on PMIs to bolster the case for standing pat in the face of clear evidence that suggests the economy may not be poised to enjoy the type of bounce some predicted following the election.
And remember, Brexit is still Brexit – a seismic geopolitical and economic shift. Just because the path is now cleared for it to happen, does not change the ambiguity around the future.