There is one more hawk in Britain

Last week central banks from some of the major global economies took decisions on the direction of their monetary policy. Both the Federal Reserve and European Central Bank indicated moves to tighten policy. They are intent on shifting towards ‘normalisation’, with the US much more advanced in this respect. As mentioned, the Bank of Japan decided to maintain its accommodative policy, leaving rates unchanged. This week, it was the Bank of England’s (BoE) turn to take a decision on whether to raise rates.

Members of the BoE’s Monetary Policy Committee (MPC) met on Thursday and investors correctly predicted that the bank would not push for an increase this month. Before the meeting the probability of a rate hike was set at 2.0%.

Probability of BoE Raising Interest Rates at June Meeting

Source: Bloomberg, Data as of 20 June 2018

A good steer in advance of the meeting as to the likely outcome was provided by Silvana Tenreyro, an external member of the MPC. Earlier in the month she may have inadvertently led markets when she said “while I anticipate that a few rate rises will be needed, the timing of those rate rises is an open question”.

Although the final no rate rise outcome did little to get pulses racing, there were some interesting new features. For example, the bank signalled a hawkish tone in its post meeting statement saying it wants to move faster toward ‘normalising’ monetary policy. The BoE signalled that it would be lowering the threshold for when it would start to unwind its Quantitative Easing (QE) programme. Previously, the BoE had stated it considered reducing its QE stimulus once interest rates had reach 2.0%, however, this rate has now been lowered to 1.5%; although the bank said it would need assurances that the UK’s economic backdrop was strong enough to support the change.

Another unexpected turn for markets was Andy Haldane, chief economist of the BoE, changing his vote to favour a rate rise. This is the first time that Mr Haldane did not side with the majority favouring of holding rates since he joined the MPC in 2014, thus it was a big change for him. His shift in voting intentions left the overall vote at 6-3 and indicates opinion of rate setters edging closer to tightening monetary policy.

A new hawk within the MPC gave sterling a boost versus the US dollar with the rate rising to £1/$1.32 and gilt yields firmed slightly on the news. The market probability forecast after the new information was digested jumped by 22% and is now at 71% for a rate rise in August. Higher interest rates are coming!

Probability of interest rate rise in BoE August meeting

Source: Bloomberg, data as of 22nd June 2018