In a break from the global easing tsunami that has swept the world in the past 48 hours, moments ago the Bank of England did not cut rates - as expected - in a unanimous 9-0 decision.
The MPC noted that near-term data has been broadly in-line with projections made in the May report, however, downside risks to growth have increased; the bank also said that global trade tensions and especially the increasing risk of a no deal Brexit: “Domestically, the perceived likelihood of no-deal Brexit has risen,” the bank said in a summary of monetary policy.
Today's announcement follow a May report in which the BOE indicated that more rate hikes would be needed over the next few years to keep inflation under control, and said the market curve doesn’t reflect that. Since then investors have increased bets in the other direction, with the market showing a greater likelihood of a cut rather than an increase as the next move.
The market moves “highlighted the ongoing tension between the MPC’s forecast conditioning assumption of a smooth Brexit and the assumptions about alternative Brexit scenarios that were priced into the financial market variables,” the minutes said.
While Mark Carney's central bank said it still sees the need for interest-rate hikes in coming years if the forecasts bear out, they also said that investors are taking a different view than the bank’s assumption of a smooth Brexit. That pressured the pound and market expectations for future interest rates, the Monetary Policy Committee said in the minutes of its June meeting. The pound declined after the report while UK equities jumped.
Some other observations:
- Rates: Maintains guidance that rates will be raised at a gradual pace and to a limited extent
- Brexit: Maintains guidance that the monetary policy response to Brexit, whatever form it takes, will not be automatic and could be in either direction
- Growth: After 0.5% growth seen in Q1, Q2 GDP is expected to be flat (Prev. view of 0.2%); in part reflects an unwinding of stockpiling seen in Q1
- Inflation: CPI is likely to slip below the 2% target this year amid declines in energy prices
- Investment: Weak business investment has persisted
- Labour/wages: Market remains tight and broadly in line with projections made in the May report
The kneejerk reaction in the market was of a dovish report, with cable sliding 30 pips from session highs before stabilizing around 1.2700.