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Sterling Tumbles After Dovish 25bps Rate Hike By BOE

Courtesy of ZeroHedge View original post here.

For the third month in a row, the Bank of England – which got an early hear start in the tightening race by hiking from zero by 25bps last December – has hiked rates by the 25bps as expected, pushing the official BOE bank rate to a pre-pandemic level of 0.75%, in a surprising 8-1 vote split, with Deputy Governor Cunliffe voting for no change amid fears over shrinking real household incomes.

The hike marks the quickest pace of tightening since 1997, just after the BOE won the authority to set policy independently.

The central bank said that the war in Ukraine would push inflation to around 8% in the second quarter, up from 7.25% previously. It warned the peak rate later this year could be “several percentage points higher” than estimated in February.

In a far more dovish statement than February, or the Fed yesterday, Andrew Bailey's central bank said a further tightening of policy “might be” appropriate in the coming months, a major softening from the wording in February, when they said such a move was “likely.” They also noted “there were risks on both sides of that judgment.”

At the same time, the BOE warned that the spike in inflation means the squeeze on households incomes in the U.K. will be “materially larger” than implied in February. It also warned that the war in Ukraine will exacerbate global supply chain disruptions and said its regional agents found evidence it’s already snarling supply chains for manufacturers.

The BOE noted that the squeeze on incomes will lead to a weaker outlook for growth and raise unemployment, officials said. Cunliffe in voting to leave rates unchanged focused on that dynamic and concerns about the “very material negative impacts” that higher commodity prices will have on living standards. For the rest of the committee, robust growth in recent months and a continued tightening in the labor market warranted a move, Bloomberg notes. They said that job shortages were unlikely to ease as quickly as had been expected in February.

The decision suggests policy makers expect an increasingly delicate balancing act in the coming months as they weigh both how to combat inflation and the growing threats to growth from the impact of the war in Ukraine.

Further out, the BOE also said inflation will “fall back materially,” a comment that, combined with the gloomy outlook for living standards, suggests a degree of pushback against current market pricing for rates to hit 2% by the end of the year.

For now, the BOE is leading the way in a global tightening of monetary policy, and is the first major institution to bring rates back to their pre-covid setting. The BOE decision came just hours after the U.S. Federal Reserve raised interest rates by a quarter percentage point and signaled six more such hikes this year.

In kneejerk response, and in stark contrast to February, sterling tumbled sharply as Gilts spiked on the 8-1 split and Cunliffe's vote to keep the bank rate at 0.5%, while the BOE continues to push back against market pricing for further tightening. Cable dropped as much as 1.31 from 1.32 before the announcement. Meanwhile 10Y gilts is over 122 and STIR contracts are unwinding hike expectations.


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