Pound Plunges After BOE Votes 6-2 To Keep Rates Record Low, Cuts Growth Forecast

Tyler Durden's picture

The whispers about a potential rate hike by the recently hawkish BOE ended up being wrong, when moments ago the Bank of England announced that in a 6-2 decision it kept rates unchanged at 0.25%, largely as expected. Saunders and McCafferty dissented in favor of an immediate interest-rate increase, with Haldane refusing to join the dissenters.

In separate unanimous decisions, the central bank also kept its bond purchase programs unchanged at GBP10BN and GBP435BN for corporate and government bonds respectively.

The pound tumbled on the news...

... sliding as low as 1.3158, a 0.5% drop, as did 10Y Gilt yileds.

While the decision was largely as expected, what has mostly hit the pound is the BOE's cut of its 2017 GDP forecast to 1.7%, and the trim of 2018 from 1.7% to 1.6%. It also slashed wage forecasts – the bank now sees 2018 wage growth at 3% now (vs. 3.5% in May).

The BOE also announced that it would end term funding drawdown in February 2018 – this may have a small impact upon long term OIS.

As the cable plunged, the FTSE 100 index rose as much as 0.5%, testing its 50-DMA, on the back of the BOE's dovish U-turn.

The BOE did caution again, however, that "if the economy follows a path broadly consistent with the August central projection, then monetary policy could need to be tightened by a somewhat greater extent over the forecast period than the path implied by the yield curve underlying the August projections." So far that's not happening.

The monetary policy statement is below:

The Bank of England’s Monetary Policy Committee (MPC) sets monetary policy to meet the 2% inflation target, and in a way that helps to sustain growth and employment.  At its meeting ending on 2 August 2017, the MPC voted by a majority of 6-2 to maintain Bank Rate at 0.25%.  The Committee voted unanimously to maintain the stock of sterling non-financial investment-grade corporate bond purchases, financed by the issuance of central bank reserves, at £10 billion.  The Committee voted unanimously to maintain the stock of UK government bond purchases, financed by the issuance of central bank reserves, at £435 billion.  The Committee voted unanimously to close the drawdown period for the Term Funding Scheme (TFS) on 28 February 2018, as envisaged when the scheme was introduced.


The MPC’s overall assessment of the outlook for inflation and activity in the August Inflation Report is broadly similar to that in May.  In the MPC’s central forecast, GDP growth remains sluggish in the near term as the squeeze on households’ real incomes continues to weigh on consumption.  Growth then picks up to just above its reduced potential rate over the balance of the forecast period.  Net trade and business investment firm up, and consumption growth recovers in line with modestly rising household incomes.  Net trade is bolstered by strong global growth and the past depreciation of sterling.  The combination of high rates of profitability, especially in the export sector, the low cost of capital and limited spare capacity supports investment by UK firms over the forecast period, offsetting the effect of continued uncertainties around Brexit.


CPI inflation rose to 2.6% in June from 2.3% in March, as expected.  The MPC expects inflation to rise further in coming months and to peak around 3% in October, as the past depreciation of sterling continues to pass through to consumer prices.  Conditional on the current market yield curve, inflation is projected to remain above the MPC’s target throughout the forecast period.  This overshoot reflects entirely the effects of the referendum-related falls in sterling.  As the effect of rising import prices on inflation diminishes, domestic inflationary pressures gradually pick up over the forecast period.  As slack is absorbed, wage growth is projected to recover.  In addition, margins in the consumer sector, having been squeezed by the pickup in import prices, are projected to be rebuilt.  Consequently, inflation remains at a level slightly above the 2% target. 


As in previous Reports, the MPC’s projections are conditioned on the average of a range of possible outcomes for the United Kingdom’s eventual trading relationship with the European Union.  The projections also assume that, in the interim, households and companies base their decisions on the expectation of a smooth adjustment to that new trading relationship.  Other important judgements include:  that the lower level of sterling continues to boost consumer prices broadly as projected, and without adverse consequences for inflation expectations further ahead;  that regular pay growth remains modest in the near term but picks up over the forecast period;  and that subdued household spending growth is largely balanced by a pickup in other components of demand.

Monetary policy cannot prevent either the necessary real adjustment as the United Kingdom moves towards its new international trading arrangements or the weaker real income growth that is likely to accompany that adjustment over the next few years.  Attempting to offset fully the effect of weaker sterling on inflation would be achievable only at the cost of higher unemployment and, in all likelihood, even weaker income growth.  For this reason, the MPC’s remit specifies that, in exceptional circumstances, the Committee must balance any trade-off between the speed at which it intends to return inflation sustainably to the target and the support that monetary policy provides to jobs and activity.  Through most of the forecast period, the economy operates with a small degree of spare capacity and CPI inflation is well above the target.  By the end of the forecast, that trade-off is eliminated.  Spare capacity is fully absorbed, and inflation remains above the target.

The Committee judges that, given the assumptions underlying its projections including the closure of the drawdown period of the TFS, and allowing for the effects of the recent prudential decisions of the Financial Policy Committee and the Prudential Regulation Authority, some tightening of monetary policy would be required to achieve a sustainable return of inflation to the target.  Specifically, if the economy follows a path broadly consistent with the August central projection, then monetary policy could need to be tightened by a somewhat greater extent over the forecast period than the path implied by the yield curve underlying the August projections.


In light of these considerations, six members thought that the current policy stance remained appropriate to balance the demands of the MPC’s remit.  Two members considered it appropriate to increase Bank Rate by 25 basis points.  All members agreed that any increases in Bank Rate would be expected to be at a gradual pace and to a limited extent.  The Committee will continue to monitor closely the incoming evidence, and stands ready to respond to changes in the economic outlook as they unfold to ensure a sustainable return of inflation to the 2% target.

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Daves Not Here's picture

Oh look! A shitty fiat currency is being compared to another shitty fiat currency!

pliny the longer's picture

so true; currency trading has never made any sense to me, I just don't get it, at least as to each other; we are all in currency trading of one sort or another, but pound vs yen vs dollar, it just all feels like one big circle jerk doesn't it?

ya i know, its frustrating as hell but when ancient jewish scriptures, the Bible and the Koran all speak of gold as a valuable commodity, I think we might want to pay attention to what men have held in high esteem over the ages;  that just about covers all the bases except for the buddhists but they're a bunch of weird fuks anyway . . . 


TrajanOptimus's picture

This race to the bottom means at some point my mortgage payment will be the same as the cost of a snickers bar.

I am Jobe's picture

God Save the Fucking Queen and the Royal Family. Yeah the loot is over now you get to see how the Empire crumbles with no loot to prop it up. 

wmbz's picture

Now who could have seen this coming?


J J Pettigrew's picture

Free Markets ... where the cost of money (interest) is determined by committee....

Central Planners decide, and in so doing, willfully and knowingly hurt one group at the expense of another.

Buy stocks.......they have decided to help that group.

BandGap's picture

Race for the bottom. This is exciting!

Batman11's picture

Neo-liberalisms success was debt fuelled and interest rate rises have become almost impossible.


Its economics doesn’t look at private debt in the economy, letting real estate booms rip globally. If you were looking at private debt in the economy, you wouldn’t let them happen.


1929 and 2008 stick out like sore thumbs; bank credit going into financial speculation and stocks (1929) or real estate (2008).

Leveraged financial speculation with bank credit.

If the FED has been looking in the right place, and knew about Minsky Moments, they wouldn’t have let the US go through one in 2008 if they had been interested in financial stability.

The global private debt load rises as its mainstream neoclassical economists are oblivious to the problem. The West had saturated in private debt by 2008 and China and the emerging markets are catching up.

Probably the greatest failure of economics in the history of mankind, its first global disaster.

Batman11's picture

The sham of Central Banks controlling the economy with interest rates began when they let economies saturate with debt.

The interest rate tool becomes useless as it has been in Japan since 1989.

Richard Koo studied 1929, Japan 1989 and 2008 and has the data to show why interest rates and QE won’t help now.


Central banker’s trained in neoclassical economics were always going to make themselves redundant.

There are people who have worked out what is going on outside the mainstream:

Steve Keen - Minsky moments and affects of debt on the economy

Richard Werner - Money and debt, bank credit and how it must be allocated for economic success, studying Japan around 1989

Michael Hudson - The history of economics, what has been forgotten but is still true

Richard Koo - After the Minsky Moment, studied 1929, Japan 1989 and 2008.

Goldenballs's picture

How bad is the UK economy ? Its so bad its in freefall..........Bring on the collapse its time to start again,enough of everyone toiling to look after the 5%,peope need a future,society needs to reward those who work today.

pc_babe's picture

Market says ... its dollar over pound. Why? To drive a wedge between US and UK.

All hail the failed state of EU!

We suspect the result would have happened the same in any of the 3 scenarios:

Increase Rate
Rate stays same
Cut Rate

JailBanksters's picture

With all western central banks in the same boat, is anybody with a loan or credit card paying sweet F all in interest rates ?

No, why Not.

Too-Big-to-Bail's picture

There is a high degree of desperation now to fulfill the quota for the next level in the 'multi-level marketing' scheme so rates have to be low to get all the new recruits in

Watson's picture

...recently hawkish BOE...

The BOE has not been hawkish since 1945.
There has always been a 'good reason' (AKA a perceived political imperative)
why GBP interest rates, after deduction of basic rate taxes on interest,
have been nearly always less than UK inflation.

Not even the aging of the UK population, which ought to give more influence
to savers, has changed that perceived imperative.