Photographer: Simon Dawson/Bloomberg

BOE Hawks May Be Aiming For Reset, Not Lift Off

Policy makers may take a leaf out of the Fed's book when it comes to tightening
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Bank of England officials are laying the ground for the first rate hike in more than a decade, but don’t expect that to herald the start of a full-blown tightening cycle.

Minutes from the bank’s September meeting, released Thursday, warned that an interest-rate increase could happen within months if the economy performs as officials expect. That prompted traders to ramp up bets that policy makers are finally ready to deliver their first hike in more than a decade.

Carney Sees Scope For BOE Hike Over Coming Months

The line that got investors particularly excited was a reference to how the majority of the BOE’s nine officials judged that “some withdrawal of monetary stimulus was likely to be appropriate over the coming months.” Given the Monetary Policy Committee introduced emergency easing measures to steady the economy after the U.K. Brexit vote, that could suggest they are initially content to frame any rate increase as merely a reset to the its previous level. 

“It is understandable the MPC are talking tough but obviously any hike is still data dependent,”  said RBC economist Sam Hill. “Any potential tightening could well be presented as unwinding the post-referendum cut. Presenting it that way would be one way to try and reassure that the 'gradual and limited' mantra on tightening is valid in practice.” 

Policy maker Gertjan Vlieghe – the most dovish MPC member – has a chance to weigh in when he speaks in London on Friday.

There’s recent precedent for such a strategy from across the Atlantic, where the Federal Reserve’s first rate increase since the financial crisis in December 2015 was followed by a year long pause before officials started the tightening cycle in earnest.

Money markets suggest traders are expecting the BOE to pursue a similar path. While one 25-basis-point hike is now fully priced in for February, a second one isn’t expected until beyond the same month in 2019.

BOE officials themselves were also keen to stress that, when they come, rate increases will be gradual and limited, and flagged the considerable risks to the economy, not least from the Brexit divorce process from the European Union. That means that while November’s meeting is very much in play for a hike, that could be it for a while. 

— With assistance by Stephen Spratt

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