02 Feb 2018
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BoE's super-meeting partially lived up to the hype, but not for all of the obvious reasons. The most 'hawkish hike' rate vote in our book was 7-2, and that duly transpired. However, the minutes and aspects of the QIR and the MPC minutes told a rather different story - leading some to believe that it was a 'one and done' move. While the instantaneous reaction was built on this notion, some of the rationale was less than convincing. Essentially, Gov Carney's presser reaction looked panic-driven on too many shorts rather than a sea-change in market sentiment.
Bulls/doves liked the Brexit dependency angle
Bulls rejoiced the Brexit dependency headlines angle and the STIR/OIS curves did too - bull-flattening and next move pushed out to late Q3 2018. While extremely repetitive, future rate tightening verbiage will be at a gradual pace and to a 'limited extent'. We couldn't see much there in isolation to get excited about though price action suggested otherwise. More pertinent in this respect was the BoE's statement that it had dropped the line about doing more than the market currently expects, this was prompted most of all by the reinforced Brexit uncertainty.
Bears/hawks were crowded out, but may have last laugh
We couldn't quite understand all the fuss over today's dovish reaction. The 25 bp hike merely reversed out an emergency rate cut in the summer of 2016 that in hindsight wasn't necessary. So we're back to where we were. But with inflation still above target in 2020, and after 2 more hikes that 'are needed' the clear inference is that more will be done and perhaps sooner, remembering that rate action has a time lag of 9 months at least. This suggests a 2nd hike next year, but why not 2 moves and sooner? Other hawkish aspects: growth may run higher than 0.4% q/q pace seen, the projection of a smooth path to an EU trade deal, while wages will gradually pick up to 3.25% - all quite rate tightening friendly impulses.
Neutral impulses that could eventually matter
Carney's assertion that the time horizon for inflation to reach target may not be the text-book 18-24 months due to the exceptional circumstances prompted by Brexit. Nonetheless, there is symmetrical risk to this prognosis - Brexit could expedite or slow the next half dozen move(s) with greater EU/UK clarity over a transitional deal. This could equate to more/sooner 'live' meetings or fewer - only time will tell. Finally, there could've been more than the 2 MPC dissenters, Cunliffe and Ramsden were the bare MPC minimum and others obviously saw the need to act sooner than their recent comments suggested. AB
[BoE POLICY OUTLOOK . BANK RATE 0.25%, LAST MOVE +25 BP NOV 2017, NEXT MEET DEC 14 2017]
IGM FX and Rates
By Marcus Dewsnap 09 Apr 2018
Welcome to our newsletter, The Context, from IFI Research, containing thought leadership articles spanning a host of asset classes.