State Street Comments on Bank of England Monetary Policy Decision

In reaction to the Bank of England (BoE) Monetary Policy Committee (MPC) meeting today, Timothy Graf, head of macro strategy for EMEA at State Street Global Markets and Alan Wilson, active fixed income portfolio manager at State Street Global Advisors, offer their views.

Graf comments, “After recent warnings that markets were under-priced for potential interest rate hikes, the MPC appears close to following through and tightening its policy in response to above-target inflation. Going into the meeting, UK short rate curves were very flat and the trade-weighted pound was sitting not that far off its post-referendum lows. Today’s hawkish outcome has the potential to spark upward revisions in market pricing for both.”

Wilson comments, “Contrary to market expectations, the MPC has stepped up its hawkish rhetoric at the September meeting. From today’s release, it is clear the committee has run out of patience with market based-rate expectations – the economy has performed in line with BoE forecasts, while the labour market has tightened below the non-accelerating inflation rate of unemployment (NAIRU) estimates, while at the same time Brexit-driven sterling weakness has resumed. Yet, there has been a downward shift in market based rate pricing. While Michael Saunders and Ian McCafferty remain the only voters for a base rate hike splitting the committee 7-2, it is clear by the tone of the accompanying minutes the hawkish stance of the MPC has substantially firmed. While hawkish dissent has clearly spread, its’ unlikely today’s announcement will culminate in formal policy tightening. It appears the MPC has learned lessons from the European Central Bank (ECB) in 2011; it will avoid premature tightening amid transitory inflation pressure.  Alternatively, the MPC will continue with its current gambit of using hawkish signalling to encourage the market to dampen inflation expectations on its behalf, until Brexit-driven weakness drags Consumer Price Index data (CPI) back toward its target over the course of the first half of 2018.”

Author: Dylan Jones

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