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[Markets] Pound Tumbles After Bank of England Hikes 25bps In Split Decision, Drops Guidance Of Future Rate Hikes Pound Tumbles After Bank of England Hikes 25bps In Split Decision, Drops Guidance Of Future Rate Hikes

Moments ago the Bank of England hiked rates for the 5th straight time, raising interest rates by 25bps to 1.25% in a split 6-3 decision, with 3 members - Haskell, Mann and Saunders - calling for an even bigger, 50bps hike saying faster policy tightening now would help to bring inflation back to the target sustainably in the medium term and reduce the risks of a more extended and costly tightening cycle later. Ahead of the announcement, 34bps of tightening was priced in, so the move comes roughly in line with expectations. The BOE also dropped guidance around a future rate hike - it had previously stated that "some degree of future tightening in monetary policy may still be appropriate - which was viewed by the market as dovish and hammered cable.

Policy makers led by BOE governor Governor Andrew Bailey sent their strongest signal yet that they are prepared to unleash larger moves if needed to tame inflation, hinting that they may join a growing global trend for larger hikes if inflation continues to soar, saying “it would be particularly alert to indications of more persistent inflationary pressures, and would if necessary act forcefully in response.”

Unlike May, that language was endorsed by all the BOE’s voters, a departure from last month when two declined to sign up to guidance that more hikes were needed.

The bank also raised its forecast for the peak of inflation this year to “slightly above” 11%, reflecting the planned increase in the energy price cap in October, and said it now expects the economy to contract in the current quarter.

Some more details from the statement:

INFLATION:

  • CPI inflation had been expected to average slightly over 10% at its peak in 2022 04
  • Conditioned on the rising market-implied path for Bank Rate at that time and the MPC's forecasting convention for future energy prices. CPI inflation had been projected to fall to a little above the 2% target in two years time, largely reflecting the waning influence of external factors and to be well below the target in three years, mainly reflecting weaker domestic pressures
  • The risks to the inflation projection had been judged to be skewed to the upside at these points.

GROWTH:

  • There has been relatively little news in global and domestic economic data since the May Report, although there have been significant movements in financial markets.
  • UK-weighted global growth in 2022 Q2 appears to be broadly in line with expectations.
  • Bank staff now expect GDP to fall by 0.3% in the second quarter as a whole weaker than anticipated at the time of the May Report
  • Consumer confidence has fallen further, but other indicators of household spending appear to have held up.
  • Some indicators of business sentiment have weakened, although they have so far remained more resilient than indicators of consumer confidence and consistent with positive underlying GDP growth

As Bloomberg notes, for now the BOE, which was first major central bank to hike rates after the pandemic, is moving slower than some of its peers.  The U.S. Federal Reserve raised interest rates by 75 basis points on Wednesday, the biggest increase since 1994. The Swiss National Bank also surprisingly hiked rates by 50 basis points earlier Thursday.

But while the BOE is grappling with an inflation rate that has already hit a four-decade high of 9%, officials are also concerned about an economic slowdown that is putting the UK at risk of recession.

Data this week showed the economy contracted in April, and officials now predict it will shrink 0.3% in the second quarter, after previously expecting a 0.1% expansion. The longer-term outlook is also grim, with the OECD saying this month that it sees no growth in the UK next year -- the worst outlook among major nations.

Indeed, anticipating that stagflation is imminent, those BOE members backing a 25-basis-point move this month - including Bailey - said demand might be starting to slow. But, with prices soaring and officials seeing no signs of deterioration in the ultra-tight labor market, Michael Saunders, Catherine Mann and Jonathan Haskel all voted for a half-point increase.

Those members saw more prospect of a surprising resilience in demand or shortfall in supply. The minutes of the meeting said there were “mixed signs” on the extent to which the living standards squeeze was weighing on consumer spending. Confidence has dropped but “indicators had held up.”

Either way, the trend for higher rates is clear, threatening to heap more pain on an already creaking UK economy that is dealing with surging tax, fuel and food bills, along with political turmoil and the messy repercussions of Brexit. Adding to the misery, next week railway workers are due to hold a three days of strikes, which economists say will cost the nation almost £100 million.

The decision is also the first since Chancellor of the Exchequer Rishi Sunakannounced a multi-billion-pound aid program to help households cope with soaring energy bills, allaying some concerns of the depth of the nation’s cost of living crisis.

The BOE estimated that package will raise the level of output by around 0.3%, and inflation by 0.1 percentage point, in the next 12 months “with some upside risks around these estimates.”

In response to the hike which was seen as in line to expectations, but lower than needed, cable slumped...

... with FX strategist Viraj Patel summarizing it best, saying the outcome was "Lose-lose for GBP. BoE sees growth as a risk... so they didn't hike bigger this time. And if they have to hike bigger in the future, it's because inflation is sticky & bigger hikes bring forward UK recession risks. UK is the archetypal stagflation trade."

Meanwhile, gilts also slumped with 30Y yields surging 10bps at 2.74%, perhaps on fears that the BOE's hiking cycle may be coming to an end, and the central bank has capitulated to rising inflation.

Tyler Durden Thu, 06/16/2022 - 07:27
Published:6/16/2022 6:50:00 AM
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