02 Feb 2018
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BoE/UK INSIGHT A bolt from the blue on successive days as the BoE/MPC left no doubt that there has been a behind-the-scenes policy shift. Publicly, the BoE/MPC left Bank rate steady at 0.25% at the conclusion of the Sep meeting by a mostly expected 7-2 vote though there was significant risk for 6-3 - this following the ramp up in inflation to a 5-year high 2.9%. The CPI topped estimates as did all the other inflation metrics and prompted the more hawkish minutes warning that rates could be tightened in coming months. Several macro reasons cited, but capacity being eroded at a quicker rate than some expected the most telling. There was little reference to Brexit and while growth was seen staying where it is in the s/term, the MPC now seems more concerned that stimulus taken (last year plus other measures) may be stimulating too much. Shock number two came via previous dove Vlieghe who compounded the hawkish slant by stating that rates would need to go up more than once if the economy evolved as expected. He also thought the equilibrium rate is now higher than he thought. All this marked a sea change and divergence from Aug's message - via the QIR, mins and from Gov Carney. Gilt yields had seen recent lows revisited (just below 1%) but punched on to reach 1.25% after the BoE surprise. In Aug's QIR f/c 2017 GDP was trimmed to 1.7% from 1.9%, and 2018 by a similar amount as well, and lowered future wages to 3%. BoE's resident dissenters were Saunders and McCafferty (for the 3rd month), Hitherto guidance indicated the first hike in Q3 2018, 2nd by H1 2020, but obviously these estimates are now confound to the history books. While the MPC had stated that it didn't want to pin itself to the market's assumptions, clearly the new guidance was intended to send a clear and changed message. We suspect a knife-edge vote in Nov as some members will want to see more data and the Gov will prefer a unanimous verdict to lift rates for what would be the first time in a decade. November hike chances (via WIRP) are now at 64% vs 35% shortly after Aug's QIR, As a result we affirm our UK 10 YR Gilt target for 1.50% in Q4 and next year we wouldn't be surprised to see a 1.50-1.90% range. AB
[BoE POLICY OUTLOOK . BANK RATE 0.25%, LAST MOVE -25 BP AUG 2016, NEXT MEET NOV 2 2017]
IGM FX and Rates, IGM Credit
By Marcus Dewsnap 20 Nov 2017
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