Everyone Gets How Badly the BOE Wants to Hike Rates
Communication received loud and clear. The Bank of England did just enough to keep interest rate expectations alive for a hike in its key interest rate in May to 0.75 percent -- and beyond.
The switch to a 7-2 vote at Thursday's policy decision, with the most voluble hawks Michael Saunders and Ian McCafferty reverting to wanting an immediate hike, is not really a sign of foot-dragging among the majority. In fact, it is quite useful for Governor Mark Carney, as it clearly points out the direction of travel for the Monetary Policy Committee as the May meeting approaches.
Markets, including the currency, seem on board with that message, which explains the limited market reaction. This is significant, if the bank is about to embark on a rate-hiking cycle for the first time in a decade. The Monetary Policy Committee is emitting a much more coordinated message now with even its arch doves, such as Dave Ramsden, having recently given hawkish signals.
Officials have been careful to note caveats over Brexit. And a notable new entrant in the concerns column is an increase in protectionism. That is straight out of the European Central Bank's playbook -- a rod to beat the politicians with if central bank forecasts don't pan out.
Nonetheless the rate-hiking path is clearly visible. In the statement that was almost completely in tune with the one in February, there were two sentences that suggested there's more to come past the May 10 meeting.
"Inflation is expected to ease further in the short term although to remain above the 2% target. Pay growth continued to pick up."
If anyone doubted that the bank was willing to look through slower consumer price growth, the minutes should remove it. Though Tuesday's report of the 0.3 percentage point drop in the February CPI to 2.7 percent looks like the wrong direction of travel, the main point is that officials still expect inflation to be above their two percent target by the end of their forecast period.
The sentence on pay is striking. This isn't just about Wednesday's strong wage data. The government's announcement this week that it will lift the public-sector pay cap for the National Health Service shows price pressures building in the economy. And that's a very important point for the MPC.
This explains how rates markets were ahead of the game in building in a rate hike in November...and sticking to that after Thursday's announcement. Now that the Federal Reserve is now roughly on a path for a rate increase every quarter, the BOE appears to want to be on a semi-annual one. And traders are giving an 80 percent likelihood to that happening, with the yield on June 2019 short-sterling futures 40 basis points higher than the contract for June 2018.
The bank's in the perfect position, and Carney is content to let the market work it out for itself. There is no need for the explicit signalling the BOE carefully made in the lead-up to the first hike in November.
So there we have it -- a bit of wiggle room but expectations are broadly for three hikes, to possibly four, priced in over the next two years. Isn't it nice when everyone is on the same page.
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