In light of the previously noted speculation that the BOE may come out on the hawkish side in its commentary today, that's precisely what the Bank of England did today when it kept rates unchanged at 0.5%, and QE flat as expected in a unanimous 9-0 vote...
... but what traders have immediately honed in on is the following language from the statement, in which the BOE raised its growth forecast and said that the "Committee judges that, were the economy to evolve broadly in line with the February Inflation Report projections, monetary policy would need to be tightened somewhat earlier and by a somewhat greater extent over the forecast period than anticipated at the time of the November Report, in order to return inflation sustainably to the target."
The reason for the surprisingly hawkish language is that in thequarterly inflation report, the BoE’s Monetary Policy Committee agreed a statement saying that the central bank was no longer willing to tolerate inflation above its 2 per cent target for the next three years.
As the FT reminds us, today's language was similar to that in September’s MPC minutes, which immediately preceeded the first interest rate rise in a decade in November, raising official rates to their current level of 0.5 per cent.
But the main change in the forecasts from three months ago was an upward revision to the BoE’s expectation of the strength of the global economy, which helps Britain’s exporters, nudging up the forecast UK growth rate in 2018 from 1.7 per cent to 1.8 per cent.
As a result of the clearly hawkish bias, the report is sparking expectations the BoE may proceed with its next hike as soon as its May meeting.
Some caveats via the FT:
- The Committee’s forecasts were finalised before the recent volatility in financial markets and while the MPC said it was “too early” to gauge any effect of lower equity prices on the economy, it added that “notwithstanding recent volatility in financial markets, global financial conditions remain supportive”.
- The committee still assumes a “smooth” Brexit, but adds that leaving the EU “remains the most significant influence on, and source of uncertainty about, the economic outlook”. It noted that leaving the EU was “key influence” in the tepid growth of business investment and household spending growth was likely to remain muted this year as a result of relatively weak rises in income.
Some other observations:
On inflation, a slightly dovish take:
On balance, CPI inflation is projected to fall back gradually over the forecast but remain above the 2% target in the second and third years of the MPC’s central projection.
On the labor market:
The firming of shorter-term measures of wage growth in recent quarters, and a range of survey indicators that suggests pay growth will rise further in response to the tightening labour market, give increasing confidence that growth in wages and unit labour costs will pick up to target-consistent rates.
GDP growth is expected to average around 1¾% over the forecast, a slightly faster pace than was projected in November despite the updated projections being conditioned on the higher market-implied path for interest rates and stronger exchange rate prevailing in financial markets at the time of the forecast.
While modest by historical standards, that rate of growth is still expected to exceed the diminished rate of supply growth. Following its annual assessment of the supply side of the economy, the MPC judges that the UK economy has only a very limited degree of slack and that its supply capacity will grow only modestly over the forecast, averaging around 1½% per year.
The low cost of capital and limited spare capacity, strong global activity is supporting business investment, although it remains restrained by Brexit-related uncertainties.
The kneejerk response has been a burst higher in cable, which has spiked by over 100 pips.