The pound sharply reversed overnight losses (the result of weaker than expected UK retail sales 0.90% Y/Y, exp. 1.7%) rising as much as 0.3% to 1.2794 after the BOE announced it kept rates at 0.25%, however the hawkish surprise was the 5-3 vote, far closer than the 7-1 expected, as two more MPC members , Saunders and McCafferty joined Forbes in calling for a rate hike on the back of rising inflation concerns.
- BANK OF ENGLAND KEEPS KEY INTEREST RATE AT 0.25%; VOTE 5-3
- SAUNDERS, MCCAFFERTY JOIN FORBES IN VOTE FOR BOE RATE HIKE
— Bank of England (@bankofengland) June 15, 2017
Amid market chatter that Forbes would no longer favor a rate hike, the fact that three policy makers voted for a hike sees algo names jumping on the headline, BBg reported.
As the BOE stated, “Our Monetary Policy Committee has voted 5-3 to keep Bank Rate at 0.25%. The committee voted unanimously to continue with the programmes of corporate bond purchases and UK government bond purchases.” The result on the currency was immediate, sending cable surging on the news of the growing split within the MPC.
Separately, on QE the Committee voted unanimously to maintain the stock of sterling non-financial investment-grade corporate bond purchases, financed by the issuance of central bank reserves, at £10 billion. The Committee also voted unanimously to maintain the stock of UK government bond purchases, financed by the issuance of central bank reserves, at £435 billion.
The market was drawn to the following segments discussing inflation in the BOE statement:
The projections that the Committee published in May showed that the economy was expected to operate with a small degree of spare capacity for most of the three-year forecast period, justifying the tolerance of some degree of above-target inflation. The continued growth of employment could suggest that spare capacity is being eroded, lessening the trade-off that the MPC is required to balance and, all else equal, reducing the MPC’s tolerance of above-target inflation
CPI inflation has been pushed above the 2% target by the impact of last year’s sterling depreciation. It reached 2.9% in May, above the MPC’s expectation. Inflation could rise above 3% by the autumn, and is likely to remain above the target for an extended period as sterling’s depreciation continues to feed through into the prices of consumer goods and services. The 2½% fall in the exchange rate since the May Inflation Report, if sustained, will add to that imported inflationary impetus.
Just like the Fed, the BOE expressed ongoing confidence in the economy, as manifest by growing employment and consumer confidence despite dropping GDP:
GDP growth declined markedly in the first quarter, in part reflecting weaker household spending. It remains to be seen how large and persistent this slowdown in consumption will prove. In recent months, there have been further signs of a slowing housing market and new car registrations have fallen sharply. Consumer confidence has remained relatively resilient, however, and employment has continued to rise.
At the same time, the BOE again cautioned that “monetary policy cannot prevent either the necessary real adjustment as the United Kingdom moves towards its new international trading arrangements or the weaker real income growth that is likely to accompany that adjustment over the next few years.”
The BoE’s conclusion:
In light of these considerations, five members thought that the current policy stance remained appropriate to balance the demands of the MPC’s remit. Three members considered it appropriate to increase Bank Rate by 25 basis points. All members agreed that any increases in Bank Rate would be expected to be at a gradual pace and to a limited extent. The Committee will continue to monitor closely the incoming evidence, and stands ready to respond to changes in the economic outlook as they unfold to ensure a sustainable return of inflation to the 2% target.
As a result of the pound spike, the FTSE 100 fell 1.1% at 12:07pm in London, extending losses as currency gains weighed on its exporters. U.K. 10-year bond yield rises 8bps to 1.01% after 3 BOE members vote in favor of a rate hike; market expectations were for a 7-1 split.