Bank of England: a hawkish hold as bar to hike is lowered
The Bank of England kept rates on hold as expected but there was a clear signal that the bar to a hike is not that high.
On the one hand the decision was a little more dovish with many expecting a 6–3 vote. At 7–2 the doves appear very much in control and this seemed to be taken as a trigger to sell sterling at the moment the vote count was released. We saw a sharp plunge in cable to 1.31547, before it reversed course and turned higher as the minutes revealed a more hawkish tone than the vote suggested. Sterling jumped back to $1.33 as traders digested the details.
Indeed delving deeper into the minutes there are more hawkish tendencies coming to the fore.
The MPC thinks the economic data since August 3rd, although relatively limited, suggests growth is firmer than expected. Crucially policymakers think that slack is being absorbed faster than expected and this would be consistent with a rate hike sooner than markets currently expect. Again the MPC said monetary policy may well be tightened more than current market expectations.
And the key passage was towards the end of the minutes where the Bank offered a clear signal that a hike may be coming.
A majority of MPC members agree that as long as the economy trundles along as is, then some withdrawal of stimulus would be appropriate. It’s clearly teeing up a rate rise and wants the markets to prepare for one. Given the economy is not exactly motoring, the bar for a hike has just been lowered. The odds of a hike back to 0.5% this year have just shortened with sterling is firming as a result. This should offer solid support for the pound going into the final quarter and means a move below $1.30 is a lot less likely.
Senior Market Analyst