The BoE holds on, while sterling breaks YTD highs

The MPC voted 8-1 to maintain Bank Rate at 5.00% in their latest policy decision, matching our own call and market expectations.

That said, of the 58 economists surveyed by Bloomberg, only one expected the BoE to cut rates – meaning that today’s decision was hardly a shock to traders. Where there were hints regarding the future path for rates, these skewed hawkish relative to market expectations. This saw sterling bounce post-release, with the pound hitting year-to-date highs versus the dollar and the euro.

With this a non-MPR meeting, markets have been left to pore over the policy statement and a brief press comment from Governor Bailey post-release.

Sifting through the details, we think there are a few points of note. First, the 8-1 vote split is something of a surprise. This means that Dave Ramsden, who was a dovish dissent in June, is now once again voting with the majority – suggesting that the balance of views on the MPC may be a little more hawkish than previously understood. Second, the MPC made minimal changes to its guidance paragraph, though the MPC did add that “In the absence of material developments, a gradual approach to removing policy restraint remains appropriate”. At first glance this would appear to hint towards a quarterly pace of easing moving forward, offering a further hawkish signal to markets.

However, taken in the broader context of the statement and the minutes, we think this is more likely to be pushback against the idea of easing in 50bp increments. Specifically, the minutes state that Bank Rate is likely to decline at a “more gradual” pace than in the US – notable given the Fed’s decision to cut by 50bps overnight.

The tone of the statement was unsurprisingly echoed in a press comment from Governor Bailey released to journalists post-announcement. In it, he stated that: “Inflationary pressures have continued to ease since we cut interest rates in August. The economy has been evolving broadly as we expected. If that continues, we should be able to reduce rates gradually over time. But it’s vital that inflation stays low, so we need to be careful not to cut too fast or by too much”. With little new information on offer today, we continue to expect a 25bp rate cut in November. The December meeting looks like a toss-up, though given our expectations for inflation to cool a little faster than the BoE expects, we lean towards a rate cut then as well. As such, current market pricing for 1.7 rate cuts by year-end, looks fair to us, as does the move higher for sterling post-announcement.

Author: 

Nick Rees, Senior FX Market Analyst

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