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BOE Keeps Rates Unchanged In 7-2 Vote; Cable Plunges On Dovish Inflation Outlook

Courtesy of ZeroHedge. View original post here.

As was widely anticipated following the recent disappointing economic data out of the UK, the Bank of England announced it kept rates unchanged at 0.5% in a 7-2 vote, with Saunders and McCafferty dissenting (some more hawkish commentators were hoping for a 6-3 split).

We have kept interest rates at 0.5%. Find out more at: https://t.co/IYVjB9UHUw #InflationReport pic.twitter.com/kopH2BzDKc

— Bank of England (@bankofengland) May 10, 2018

As also expected, the BOE Committee also voted unanimously to keep its various QE programs unchanged.

However, the reason for the sharp kneejerk reaction lower in cable, which plunged as much as 100 pips on the report, was the sharp dovish language on inflation, with the key sentence the following: "Taking external and domestic influences together, CPI inflation is projected to fall back slightly more quickly than in February, reaching the target in two years."

The inflation rates of the most import-intensive components of the CPI appear to have peaked. The MPC judges that the impact of the past depreciation of sterling on CPI inflation, while remaining significant, is likely to fade a little faster than previously thought. Taking external and domestic influences together, CPI inflation is projected to fall back slightly more quickly than in February, reaching the target in two years. These projections are conditioned on a gently rising path for Bank Rate over the next three years.”

The BOE also trimmed its economic outlook: BOE's growth and inflation outlooks. The preliminary estimate of GDP growth in the first quarter was 0.1%, 0.3 percentage points lower than expected in February.  According to the BOE, this is likely in part to have reflected adverse weather in late February and early March." However, the Committee also believes that the slowing in Q1 GDP growth has been overstated in the prelim release and believe that over time Q1 will be revised higher to 0.3% and thereafter look for 0.4% in Q2.

Of greater importance was the BOE's view on Inflation, which is now seen as cooling faster than previously expected: the 2.5% CPI in March was lower than expected in the Feb QIR. Inflation rates of the most import-intensive components of CPI appear to have peaked. Impact of GBP depreciation while remains significant, is likely to fade a little faster than previously thought. CPI target is expected to be met in two years.

Other key observations:

  • Rates: No mention of the historical guidance of: rates will need to rise at a somewhat faster pace and greater extent than markets are currently pricing in. Reiterated that any future rate increases were likely to be at a gradual pace and to a limited extent.
  • Brexit: Minutes offer no new view by the MPC on the matter
  • Wages: Wage growth are firming gradually and broadly as expected.
  • Labour market: Hiring intentions remain strong and the unemployment rate has fallen slightly further over the past 3 months.
  • Slack: MPC continues to judge that the UK economy has a limited degree of slack
  • Case for unchanged: Members saw value in seeing how data unfolded in the coming months and to see whether softness in Q1 would persist.
  • Case for lifting rates: Saw Q1 GDP as erratic and due to temp factors. Placed more weight on labour data and business surveys. Reduction in pass-through of GBP on inflation would not materially impact the inflation profile in the medium term.

Separately, looking at the Quarterly Inflation Report, the BoE forecasts three rate hikes over three years. As such the UK rates markets is pricing in a more dovish path of BoE hikes.

Report, while the 2018 GDP forecast was cut (2019 and 2020 maintained), the 2018, 2019, 2020 inflation all lowered. Key forecasts:

  • GDP Growth: 2018 Q2: 1.4% (Prev.1.8 %), 2019 Q2: 1.7% (Prev. 1.7%), 2020 Q2: 1.7% (Prev. 1.7%), 2021 Q2: 1.7%
  • CPI Inflation: 2018 Q2: 2.4% (Prev. 2.7%), 2019 Q2: 2.1% (Prev. 2.2%), 2020 Q2: 2.0% (Prev. 2.1%), 2021 Q2: 2.0%
  • Unemployment Rate: 2018 Q2: 4.1% (Prev. 4.2%), 2019 Q2: 4.0% (Prev. 4.2%), 2020 Q2 4.0% (Prev. 4.1%), 2021 Q2: 4.0%
  • Average Weekly Earnings: 2018: 2.75% (Prev. 3.0%), 2019: 3.25% (Prev. 3.25%), 2020: 3.5% (Prev. 3.5%)
  • Above forecasts are based on the path for the Bank Rate implied by forward market interest rates. The implied Bank Rate at the time of the report by the end of the forecast period was 1.2%

In summary, while the BOE is certainly not ending its tightening yet, it is hardly in a rush to hike. In kneejerk response, cable has tumbled by 100 pips…

… and gilts are rallying as UK money markets price out any further rate hikes by the BOE in 2018 as the global dovish wave returns.


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