As expected, the BOE kept its interest rate unchanged at 0.25%, in a 7-2 vote, while maintaining the rest of its bond monetization programs in line in a 9-0 vote.
After an initial kneejerk reaction lower, GBPUSD has surged as traders digest the hawkish addition of language by the BOE that "some withdrawal of monetary stimulus is likely to be appropriate over the coming months in order to return inflation sustainably to target."
Some further hawkish details in the statement:
All MPC members continue to judge that, if the economy follows a path broadly consistent with the August Inflation Report central projection, then monetary policy could need to be tightened by a somewhat greater extent over the forecast period than current market expectations. A majority of MPC members judge that, if the economy continues to follow a path consistent with the prospect of a continued erosion of slack and a gradual rise in underlying inflationary pressure then, with the further lessening in the trade-off that this would imply, some withdrawal of monetary stimulus is likely to be appropriate over the coming months in order to return inflation sustainably to target. All members agree that any prospective increases in Bank Rate would be expected to be at a gradual pace and to a limited extent.
As a result, the GBPUSD is higher by nearly 100 pips on the news, while Gilt futures have tumbled to session lows on the surprisingly hawkish tone out of the central bank
And as cable surge, the natural reaction is for stocks to drop, and sure enough, the FTSE 100 has dropped 0.4%, erasing gains of as much as 0.2% as sterling spike as high as 1.3307.
Some additional comments from the BOE:
The impact of Brexit on GBP:
The circumstances since the referendum on EU membership, and the accompanying depreciation of sterling, have been exceptional. 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. The MPC’s remit specifies that, in such 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. Recent developments suggest that remaining spare capacity in the economy is being absorbed a little more rapidly than expected at the time of the August Report, and that inflation remains likely to overshoot the 2% target over the next three years.
On the US economy:
Since the August Report, the relatively limited news on activity points, if anything, to a slightly stronger picture than anticipated. GDP rose by 0.3% in the second quarter, as expected in the MPC’s August projections, although initial estimates of private final demand were softer than anticipated. The unemployment rate has continued to decline, to 4.3%, its lowest in over 40 years and a little lower than forecast in August. Survey indicators are consistent with continued strength in employment growth. Evidence continues to accumulate that the rate of potential supply growth has slowed in recent years. Overall, the latest indicators are consistent with UK demand growing a little in excess of this diminished rate of potential supply growth, and the continued erosion of what is now a fairly limited degree of spare capacity. Underlying pay growth has shown some signs of recovery, albeit remaining modest
Pound impact on inflation:
The sterling exchange rate has been volatile and the price of oil has increased. Headline and core CPI inflation in August were slightly higher than anticipated. Twelve-month CPI inflation rose to 2.9% and is now expected to rise to above 3% in October.
As Bloomberg summarizes the move, the pound has rallied as the potential BOE tightening overshadows today's expected decision: "Since U.K. CPI data Tuesday, market priced in higher probability that Chief Economist Andy Haldane would join the hawkish camp and move the MPC vote to 6-3; thus initially cable dropped to as low as 1.3155" however now, "Market focus turned to BOE’s guidance that “some withdrawal of monetary stimulus was likely to be appropriate over the coming months in order to return inflation sustainably to target,” pushing the pound higher.