Bank Of England Hikes Rates By 25bps In 7-2 Vote; First Increase In A Decade; Pound Plunges

Tyler Durden's picture

Over ten years since the last rate hike by the Bank of England in July 2007 (when incidentally, cable was trading above $2.00), and following years of market expectations of an imminent rate hike that failed to materialize...

.... moments ago the BOE - which had telegraphed the move extensively in recent months despite some dovish misgivings - finally pulled the trigger, and raised rates by 25bps to 0.5% in order to curb the effect of high inflation brought about by the post-Brexit plunge in the pound, squeezing local households and pressuring the UK economy. However, while cable initially spiked higher on the news, it subsequently slumped on the news that the vote was not a unanimous 9-0 decision as some had expected, as would telegraph a normal rate hike cycle, and instead had a decidedly dovish tilt with a far more contested 7-2 vote, with Cunliffe and Ramsden dissenting based on insufficient evidence that domestic costs, particularly wage growth, would pick up in line with central projections.

Here is the BOE assessment:

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 1 November 2017, the MPC voted by a majority of 7-2 to increase Bank Rate by 0.25 percentage points, to 0.5%.  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 also voted unanimously to maintain the stock of UK government bond purchases, financed by the issuance of central bank reserves, at £435 billion.

Some other key BOE considerations:

  • Growth: GDP grows modestly over the next few years at a pace just above its reduced rate of potential.  Business investment is being affected by uncertainties around Brexit, but it continues to grow at a moderate pace, supported by strong global demand, high rates of profitability, the low cost of capital and limited spare capacity.
  • Consumption: Consumption growth remains sluggish in the near term before rising, in line with household incomes
  • Trade: Net trade is bolstered by the strong global expansion and the past depreciation of sterling. 
  • Inflation: After CPI rose to 3.0% in September, the MPC still expects inflation to peak above 3.0% in October, as the past depreciation of sterling and recent increases in energy prices continue to pass through to consumer prices.   Expects domestic inflationary pressures to gradually pick up as spare capacity is absorbed and wage growth recovers.
  • Wages: The central projection was that whole-economy total pay growth was expected to rise from a little over 2% to 3% in a year's time, levelling out at around 3.25% in the medium term.
  • Brexit: Uncertainties are weighing on domestic activity, which has slowed even as global growth has risen significantly.  Brexit-related constraints on investment and labour supply appear to be reinforcing the marked slowdown that has been increasingly evident in recent years in the rate at which the economy can grow without generating inflationary pressures.
  • Slack: slack has reduced the degree to which it is appropriate for the MPC to accommodate an extended period of inflation above the target

The outlook:

There remain considerable risks to the outlook, which include the response of households, businesses and financial markets to developments related to the process of EU withdrawal.  The MPC will respond to developments as they occur insofar as they affect the behaviour of households and businesses, and the outlook for inflation.  The Committee will monitor closely the incoming evidence on these and other developments, including the impact of today’s increase in Bank Rate, 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.

While the 7-2 vote split was clearly less hawkish than an ideal scenario would suggest, what has spooked traders are the following parts from the statement that appear especially dovish:

  • In the MPC’s central forecast, conditioned on the gently rising path of Bank Rate implied by current market yields, GDP grows modestly over the next few years at a pace just above its reduced rate of potential.
  • In line with the framework set out at the time of the referendum, the MPC now judges it appropriate to tighten modestly the stance of monetary policy in order to return inflation sustainably to the target.
  • Monetary policy continues to provide significant support to jobs and activity in the current exceptional circumstances.  All members agree that any future increases in Bank Rate would be expected to be at a gradual pace and to a limited extent.

In immediate reaction, as shown in the chart above, GBP/USD dropped as much as 1.1% to 1.3098 low as the 7-2 vote risks that Carney adopts a dovish approach at his press conference, as policy makers saw considerable risks stemming from Brexit.  According to Bloomberg, bids at 1.3150-60 filled, with option related protection above 1.3100. One-week risk reversals at 31bps in favor of GBP puts, remain in sideways trading since mid-October.

So is this the start of a more traditional hiking cycle or just a one-off correction from last year's rate cut? According to the BOE, "all members agree that any future increases in Bank Rate would be expected to be at a gradual pace and to a limited extent." Incidentally, this is what the market expected just prior to the announcement.

Incidentally, the chart above may be right as BOE policy makers omitted language from previous statements saying that more hikes could be needed than the markets expect. That implies that officials are comfortable with pricing for two more quarter-point increases, roughly one by late next year and another in 2020.

Here is Bloomberg's take:

That’s a very prudent pace of rate hikes, the one the Bank of England is penciling in. And yet, despite the warning about the "considerable risks" coming from Brexit, it is still a path of tightening ahead. The dropped wording that interest rates may need to rise more than markets expect has markets recalibrating, with bond yields falling and pushing back expectations for a follow-up. It’s not a big reset, though, with a second quarter-point move now fully priced in for September 2018 (compared with August before the decision). That’s what the market expects

And with the overhang of more imminent rate hikes gone, Gilt yields have also tumbled.


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4shzl's picture

God save the Queen!

DEMIZEN's picture

ill laugh my ass off if loonie tanks from here.

seabass974's picture

lol wrong country wrong currency

DEMIZEN's picture

wrong copy paste my man. i have a rush. the context is similar. USD/loonie higher on no change.

XBroker1's picture

If only canadian whores weren't so ugly.

DEMIZEN's picture

I can do ugly but get soft when they say about

wisehiney's picture

And I was so worried that my hedges would not pay off.

Sorry ZH.

I often hedge.

Them, them.

Fuck them.

css1971's picture

Just doing what the BIS told them to do.

GreatUncle's picture

"the effect of high inflation brought about by the post-Brexit plunge in the pound, squeezing local households and pressuring the UK economy."

The problem with that policy is the UK economy will not now adapt to the new economic position where in theory we should be doing more for ourselves.

If we cannot import it then we must do it ourselves ... this confirms to me more that BREXIT will not happen and the government lies because the economy is being held up and not allowed to correct itself with "no support" to keep it aligned with the EU so we stay BREMAIN.

Anyway makes no difference now, the interest rate rise will result in the real economy being crushed. The last chancellor I seen do this exact same principle was Lawson to reign back inflation and a vast swathe of the economy was crushed then and all that worked based on malinvestment from easy money vanishes.

Yours truly lost their job with MOM interest rate rises once but probably more important the jewish banking fraternity also applied the same policy in the 70's, crushed my parents relationship so I come from a broken home. When the arguing is about being able to put enough food on the table for the kids and neither were drunks or druggies.

So at those running the show "we know what you have been doing and how it has adversely affected so many through decades or longer to keep you in the position of entitlement you stole".

AND THAT CUNT IN THE BOE QE £50B AFTER BREXIT AS WELL LIKE THE PERFECT EXCUSE TO DO IT.

Ghordius's picture

"The problem with that policy is the UK economy will not now adapt to the new economic position where in theory we should be doing more for ourselves."

that sounds a bit like autarky, i.e. more protectionism, less "free trade"?

the UK's economy decision makers are small biz owners up to CEOs. those are who plan for the future, adapt businesses to new economic positions

now, what do they hear from those at the helm of the "ship of state"? Mr. Boris Johnson, for example, is talking about "Greater Singapore" and Mrs May is talking about "Global Britain", i.e. a... more open, less protectionistic UK. Mr. Fox is talking about exicing future trade deals that, given the lessened position of a small market, mean more concessions to foreign trade partners, from NZ lambs to US wheat, etc. etc.

so... what exactly do those businesses have to plan for? rates might be important, but for serious business plan changes more then rates are needed

World Cash Day's picture

Not sure what you're rambling about but the BOE needs to raise interest rates yesterday to 4 or 5% - they are far too low at present.

Just encouraging massive malinvestment at rates below 3%.

buzzsaw99's picture

according to the fucktarded logic half the people on here use the 10y gilt yield should have gone up.

fat, drunk, and stupid is no way to go through life son.  [/dean wormer]

Grandad Grumps's picture

Wake me when it gets to 5%

XBroker1's picture

Which is where it should be or higher.

Watson's picture

Indeed.

6% looks about right.

With basic rate tax at 20%, and inflation at 3%,
6% nominal looks like 6*0.8 - 3 = 1.8% real, a fair return.

6% would also seriously squeeze inflation, which the UK
has always found harder to eliminate than it thinks.
And it would encourage saving, a habit that, post WW2,
UK citizens don't really do any more.

Course it won't happen: would bring down the UK property market
(so unacceptable to government, who would take back BoE's rate setting powers),
and also, as a consequence, bring down a bank or three (so unacceptable to BoE).

Shame though...

Watson

loadsofmoney's picture

I think that will be: Dig you up when it gets to 5%

 

JohnGaltUk's picture
25bps Oh my God, its over. We are now finished.