Cable Carnage Following Carney's First Bank Of England Statement
While it was not surprising that the BOE did nothing to change its rate or QE program, it was surprising (to some) that in the first official statement following the appointment of Goldman's Mark Carney as head of the Bank of England, the bank did mention that forward guidance and intermediate thresholds would likely be considered at the August assessment. Which, of course, is code for expect a major change in monetary policy. And now we also know the date, meaning that some time in August Goldman's latest central bank head will proceed doing what Goldman central bank heads do best: crush currencies in order to boost nominal, not real, returns and ensure another record Goldman bonus pool.
The full statement from the BOE:
The Bank of England’s Monetary Policy Committee today voted to maintain the official Bank Rate paid on commercial bank reserves at 0.5%. The Committee also voted to maintain the stock of asset purchases financed by the issuance of central bank reserves at £375 billion.
Since the May Inflation Report, market interest rates have risen sharply internationally and asset prices have been volatile. In the United Kingdom, there have been further signs that a recovery is in train, although it remains weak by historical standards and a degree of slack is expected to persist for some time. Twelve-month CPI inflation rose to 2.7% in May and is set to rise further in the near term. Further out, inflation should fall back towards the 2% target as external price pressures fade and a revival in productivity growth curbs domestic cost pressures.
At its meeting today, the Committee noted that the incoming data over the past couple of months had been broadly consistent with the central outlook for output growth and inflation contained in the May Report. The significant upward movement in market interest rates would, however, weigh on that outlook; in the Committee’s view, the implied rise in the expected future path of Bank Rate was not warranted by the recent developments in the domestic economy.
The latest remit letter to the MPC from the Chancellor had requested that the Committee provide an assessment, alongside its August Inflation Report, of the case for adopting some form of forward guidance, including the possible use of intermediate thresholds. This analysis would have an important bearing on the Committee’s policy discussions in August.
In the light of these considerations, the Committee voted to maintain the size of its programme of asset purchases financed by the issuance of central bank reserves at £375 billion. The Committee also voted to maintain Bank Rate at 0.5%.
The minutes of the meeting will be published at 9.30am on Wednesday 17 July.
Citi's Valentin Marinov has a first take:
The BoE released a beefed-up statement reiterating their concern about the latest backup in yields. The MPC maintained its view from the June minutes that the moves in UK rates represented premature tightening despite the latest improvement in data. The statement further seemed to confirm market expectations that Fed-type forward guidance could be among the policy changes to be introduced in August. The statement clearly highlights the MPC dovish bias against the background of improving UK data and evidence of gradual recovery in the housing market. While the release made no explicit mention of QE and rate cuts, its timing and bias represent clear sterling negatives.
Followed by SocGen which comes to the same dovish conclusion:
BoE governor Carney chose not to waste any time in shaping the bank's monetary policy since the start of his reign on Monday. One of the objectives is to increase transparency and clarity in communicating policy: this led the MPC to uncharacteristically issue a statement today despite leaving Bank rate and the Asset Purchase Target unchanged at 0.50% and £375bn, respectively. The impact on GBP and rates has been immediate, as cable plummeted from 1.5245 to below 1.5150 when news of the statement broke. EUR/GBP spiked to 0.8633, hitting a 2 ½ month high. The move lower in yields and swaps is concentrated in the front-end with 2y swaps shedding 8.9bps to 0.76%.
The statement acknowledges that there have been further signs that the economic recovery is underway, but it stresses that it remains weak by historical standards and a degree of slack is expected to remain for some time. CPI inflation is expected to rise further in the near term but is then expected to fall back towards the 2% target.
Crucially, the statement tries to downplay the impact of higher US yields on global money and fixed income markets since June and says that upward movement in market interest rates would weigh on the central outlook for growth and inflation issued in the May Inflation Report. The MPC believes that the implied rise in the expected future path of Bank Rate was not warranted by the recent developments in the domestic economy.
The statement also says that an assessment of the case for adopting ‘some form of forward guidance' including the use of intermediate thresholds could have an ‘important bearing' on the MPC's policy deliberations in August when these are discussed alongside the updated inflation and growth projections. However, the fact that a statement was released today in itself sets out the view that rates should be lower (for longer?). Whether that's communicated more formally next month in forward guidance remains to be seen but tactically it's difficult now to argue against selling GBP rallies.
For GBP/USD, a third successive weekly decline is now on the cards and a break below 1.5085 puts a return to 1.5000 back in to play. A deeper retracement to the 1.4832 low of March is possible ahead of the August meeting, but the speed of the move will be dependent on the strength of incoming US data, starting with payrolls tomorrow. Gains in EUR/GBP may be checked by a dovish ECB.
Cable reacts as largely expected to the Goldman annexation of Threadneedle:
Oh, the FTSE - aka the "wealth effect" to Goldman's Mayfair-based partners - soars.
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