Pound Surges After BOE Keeps Rates Unchanged, Warns "Withdrawal Of Stimulus Is Likely" In Coming Months

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.

Comments

smacker eforce Thu, 09/14/2017 - 07:27 Permalink

Depending on one's definition of "negative interest rates", they already exist in the UK and have done for several years.With Fixed Term/Fixed Rates on a savings account on offer from a bank (eg Metro Bank) standing at 1.00% for 18 months term and CPI inflation standing at around 3.00% (far higher if measured honestly), the sum invested is losing 2.00% pa. Many other banks offer even less than 1.00% for a similar 18 month period.That looks a lot like negative real rates to me.

In reply to by eforce

Upset Your Worries smacker Thu, 09/14/2017 - 07:58 Permalink

Smacker, I agree with you regarding the figure of at least a 2% pa loss and that we are experiencing de facto negative interest rates.

In the US, Shadowstats at least offers some insight into true inflation, which conservatively is more like 5% (myself, I reckon more like 6-7%); a shame nothing exists in the UK, as far as I'm aware, to shine a light on just how much Brits are losing out in real terms.

Wage demands of 2% are still eroding workers' buying power but are seen as a victory by unions etc. The govt counts on financial ignorance amongst the masses in pursuing their austerity policies.

In reply to by smacker

buzzsaw99 Thu, 09/14/2017 - 07:11 Permalink

what was it dimon said about bitcoin? oh yeah, blah blah blah ponzi,  blah blah blah shut it down someday.  bitch you're the one who will be shut down someday.

asteroids Thu, 09/14/2017 - 07:35 Permalink

Over the past few years, after a Bankster opens their jaws, their fiat rockets up. This burns FX shorts. For a few days or a week. Then, its all given back and more.

LostandFound Thu, 09/14/2017 - 07:36 Permalink

I have come to the conclusion that the Central Bankers will endlessly talk up and talk down the strength of there currencies forever so that it trades within a targeted range so not to cause a massive sell off or spike. This will never end?

Deep In Vocal … (not verified) Thu, 09/14/2017 - 07:42 Permalink

hahahaha..................... o my god........... the fx markets.............so fucking rigged from top to bottom.............  

iadr Thu, 09/14/2017 - 08:33 Permalink

"some withdrawal of monetary stimulus is likely to be appropriate over the coming months in order to return inflation sustainably to target." 

Well, isn't that a plain admission that stimulus is dis-inflationary? - which has been my contention  for around a year,  coming to that late conclusion due largely to an article here explaining why- misallocation of resources, when reduced to a single phrase. Seriously- isn't that a very noteworthy remark? Despite "trying to", I can't read it as supportive of the mainstream paragidm....? Am I missing something? ('cause I know they are...)