Quick view: Bank of England’s new hawkish tilt

21/06/2018

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The Bank of England (BoE) kept the Bank Rate steady at 0.5% at today’s Monetary Policy Committee (MPC) meeting but surprised the markets by adopting a more hawkish stance. Bethany Payne, Portfolio Manager, Global Bonds, explains what changed and the implications of the decision. 


While the BoE chose to keep rates on hold at 0.5% today, there was a more hawkish tilt as three MPC members were looking for a hike compared with two at the last meeting. Andrew Haldane joined the group of hawkish dissenters leading us to believe that there should continue to be a 50/50 chance of an interest rate hike at the August meeting.

The MPC view that moderately tighter policy would be needed but this would continue to be data dependent. While we have had some signs of wage pressures and improvement in retail sales, in our opinion we would need to see stronger signs of an improvement in data for the MPC to vote in favour of a hike in August.

In addition to the vote split, another point that caught our attention was the BoE’s intention to start balance sheet reduction when rates are at 1.50% rather than 2.0% in its previous guidance. While this switch to unwinding quantitative easing (QE) earlier than previously suggested is hawkish, we had already shifted our expectations lower as the lower bound for interest rates had been effectively moved to 0% from 0.5% (following the Brexit referendum), suggesting a 1.50% rather than 2% threshold to balance sheet reduction would be more consistent.

Tonight Governor Carney will be delivering his Mansion House speech; this is the first time in three years that we have the speech as previous speeches in 2017 and 2016 were cancelled. Typically, these speeches can be significant and the market will be looking for any continuation of the hawkish rhetoric.
 

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