Pound Jumps As BOE Keeps Rates Unchanged But Drops "Limited And Gradual" In Leaked Decision

In the end, all of the recent poor economic data out of the UK proved not to be enough for BOE outgoing governor Mark Carney to cut rates in his final meeting. That said, a rate cut is just a matter of when not if.

As largely expected, BOE policymakers voted 7-2 (Haskel and Saunders voting to cut) to keep the benchmark at 0.75%, an unchanged split which made a mockery of investor expectations the decision was on a knife-edge. Still, BOE officials dropped reference to "limited and gradual" tightening, a long-standing piece of BoE guidance that dated back to a time when a more rapid pace of interest rate increases might have looked likely, and signaling the tightening era is over and easing is coming, with the bank’s new forecasts showing inflation only returning to target by the end of 2021 with a quarter-point reduction in the coming year.

Markets had seen a 50% chance of a cut but the Monetary Policy Committee split once again 7-2 in favor of keeping Bank Rate at 0.75% with external members Michael Saunders and Jonathan Haskel again voting to lower rates. The expectation was for at least one more policymaker to vote for a cut.

That said, the BOE kept the door open for a move after Governor Mark Carney hands over to his successor, Andrew Bailey, in March.

“Policy may need to reinforce the expected recovery in UK GDP growth should the more positive signals from recent indicators of global and domestic activity not be sustained or should indicators of domestic prices remain relatively weak,” the BoE said in its quarterly Monetary Policy Report. But if growth picked up as suggested by upbeat business surveys since Prime Minister Boris Johnson’s unexpectedly emphatic Dec. 12 election win, “some modest tightening” of policy might be needed further ahead, the BoE said.

Here are the highlights from the decision, as recapped by Ransquawk:

  • The BOE said "some modest" tightening of monetary policy may be needed further out if econ recovers as forecast
  • If the economy develops as it expects, upward pressure on prices should build gradually over the next few years, and in that case, BOE thinks a modest increase in interest rates may be needed to keep inflation at our 2% target
  • Policy may need to reinforce expected growth recovery, if recent signs of stronger global and domestic activity are not sustained
  • The BOE said UK potential growth has weakened due to reduced investment, Brexit
  • Too early to judge impact of Coronavirus
  • BOE assumes an immediate but orderly move, at the beginning of next year, to a deep free trade agreement between the UK and the EU
  • Risks to GDP are ‘broadly balanced’, sees support from government budget
  • Domestic inflation lower than strong unit labour cost growth would suggest, BOE to research further

To be sure, the dovish tone prevailed with the BOE’s new GDP forecasts – 0.8% for 2020 and 1.4% for 2021 – well below November’s 1.2% and 1.8%. Those are also below consensus: Economists in Bloomberg’s January survey forecast 1.1% growth in 2020, and a pickup to 1.5% in 2021.

In summary, "limited and gradual" is gone - that was a line the BOE used to describe the likely path for rate hikes, and as Bloomberg notes, it marks the "end of an era." Andrew Bailey, who takes over from Carney in March, will have to get working on his own catchy phrase.

The pound jumped 0.5% higher at $1.3084 at 12:01 p.m. London time. Investors are now pricing a rate cut by August.

In the end perhaps the most controversial aspect of today's unchanged decision is that it once again appears to have leaked just moments before the 7am announcement, with GBPUSD spiking a minute before the official release.