When Andrew Bailey told a virtual panel discussion last month that the Bank of England “will have to act” on inflation, it triggered a dramatic bout of bear flattening and kicked off two weeks of front-end fireworks, as markets were forced to take seriously the prospect of multiple preemptive rate hikes from developed market central banks.
The Norges Bank had already hiked (in September) and indeed, it was just hours later when the BoE raised eyebrows with a hawkish statement a day after the Fed cemented expectations for a November taper. Subsequently, RBNZ delivered the hike originally planned for August (policymakers delayed the move due to a snap COVID lockdown) and the situation crescendoed last week with the BoC’s hawkish broadside and the RBA’s abandonment of yield-curve control. Christine Lagarde’s remark that it’s “not for me to say” whether markets are or aren’t correct in pricing ECB hikes, was yet another tacit break with convention.
This week, policymakers appeared to think better of it. Although the RBA formally scrapped the target on the April 2024 YCC note, Philip Lowe refused to give ground on the path for rate hikes, reiterating that very much contrary to market pricing, “it is still entirely possible that the cash rate will remain at its current level until 2024.”
Then, on Wednesday, Lagarde said the conditions for an ECB hike “are very unlikely to be satisfied next year.” Finally, Jerome Powell committed to “patience” on rates and again endeavored to emphasize that markets shouldn’t extrapolate anything about the timing of liftoff in the US from the taper schedule.
On Thursday, the BoE cemented what might fairly be described as a dovish mini-pivot by kicking the rate hike can to December. The vote was 7-2, a convincing margin. The market was ahead of itself. Period.
“Policymakers have, sensibly we think, opted to wait for more information on how the recent end of the furlough scheme has played out [and] the Committee will benefit from two additional jobs reports and more official data on furlough data by the time of its pre-Christmas meeting,” ING’s James Smith and Chris Turner wrote, noting that “there are other uncertainties too, and we think growth momentum will slow noticeably into winter [which] means there is also a chance that policymakers wait until February, when it will next have the opportunity to produce new forecasts and benefit from a scheduled press conference.” ING does expect rate hikes, with the first likely coming next month, but the bank says market pricing for 2022 is likely “overdone.”
November’s decision was a coin flip headed in, which at least one former trader described as “a welcome change from the done-deal, forward-guided-to-death policy approach of the Fed.” Remember, though, the withdrawal of transparency and the revocation of the market’s license to co-author the policy script, may create volatility and drama (good for traders and journalists), but it would represent a marked break with post-financial crisis precedent. Upending a decade of established behavioral patterns is inherently perilous.
The BoE’s hold triggered a fairly dramatic reaction. The pound fell 1% and markets appeared to overcorrect, as they’re wont to do when wrong-footed. Traders pushed back the first BoE hike to February.
The projected inflation path was revised higher. CPI is seen running around 4.5% “through the winter,” the MPC said, citing “further increases in core goods and food price inflation.” The bank noted the sharp rise in wholesale gas prices.
Now, the BoE expects CPI to peak near 5% in April of 2022, which the MPC politely noted is “materially higher” than the August projection (figure above).
Echoing Powell’s assessment delivered Wednesday, the BoE noted that although “the MPC’s remit is clear that the inflation target applies at all times… the framework also recognizes that there will be occasions when inflation will depart from the target as a result of shocks and disturbances.” The current environment is “unprecedented,” the statement said, on the way to emphasizing that the MPC will “focus on the medium-term prospects for inflation, including medium-term inflation expectations, rather than factors that are likely to be transient.”
Recall that the September statement was interpreted (by markets) as flagging imminent tightening. In the November statement, the BoE attempted to reconcile what some are sure to characterize as a reversal incongruent with the new forecasts.
“At its recent meetings, the Committee has judged that some modest tightening of monetary policy over the forecast period was likely to be necessary [and] the latest developments, set alongside the Committee’s updated projections, reinforce this view,” the bank said, before contending that “near-term uncertainties… especially around the outlook for the labor market” suggest the current stance of policy remains appropriate.
Earlier this week, following the RBA decision, I wrote that,
With the Fed on deck and, more importantly for the near-term rates narrative, the BoE set to reveal whether the MPC coin toss resulted in heads or tails, it’s probably a mistake to extrapolate too much from the RBA, especially considering Lowe’s emphasis on Australia being “different.”
That said, Lowe’s almost explicit ruling out of a 2022 rate hike (let alone multiple hikes) does at least suggest that after weeks of tumult, the front-end fireworks, flattening fracas and “policy error” pricing may have gone too far.
That was prescient. It does, in fact, appear that the RBA, the Fed, the ECB (i.e., Lagarde’s Wednesday remarks) and the BoE wanted to walk back market pricing for aggressive, preemptive rate hikes.
As noted above, the BoE margin was notable. “Some officials who had sounded rather hawkish in the run-up to today’s decision bafflingly didn’t follow through on their remarks,” Bloomberg’s Ven Ram said, adding that “it may well be that the BoE doesn’t want to be too far ahead of the Fed and other central banks in raising rates prematurely.”
Indeed. And, going further, “it may well be” that central banks decided after last week that enough was enough on the rate hike bets.
The market may keep pushing the envelope, especially if inflation continues to “realize” at levels that are nowhere near consistent with price stability mandates. Any ongoing tension will need to be peacefully resolved.
