Bank Of England Hints At Rate Cut As Soon As Next Meeting

October 11, 2021   |  
Bank Of England Hints At Rate Cut As Soon As Next Meeting

Less than a week ago, the Reserve Bank of New Zealand became the second developed-nation central bank to hike interest rates, acting to cool a red-hot housing market and surging inflation. A few weeks before that, Norway's Norges Bank became the first central bank in Europe to hike rates since the start of the pandemic. Now, the Bank of England is sending signs that it might become the third G-10 central bank to raise rates while the Fed dithers about tapering its asset purchases.

The British pound surged as high as 0.4% on Monday before falling back to unchanged as the market digested remarks from two senior BoE officials over the weekend suggesting that a rate hike might be coming as soon as the BoE's next meeting.

The BoE has already decided to cut the pace of its weekly bond purchases, like the Bank of Canada has cut its tapering.

Over the weekend, Michael Saunders, one of the most hawkish members of the BoE's Monetary Policy Committee, suggested in published remarks that investors were correct to bring forward their expectations for the timing of the BoE's first post=COVID rate hike. Hours earlier, BoE Gov. Andrew Bailey warned of a potentially "very damaging" period of inflation unless policy makers take action. In a way, the comments echoed remarks from certain RBNZ officials before they decided to hike.

Still, economists have apparently interpreted the remarks as clear signals that the BoE could hike as soon as its next meeting. The comments "make it clear" that upcoming policy meetings starting in November are "very much live," according to Dan Hanson, senior economist at Bloomberg Economics.

Typically - and not unlike the Fed - the BoE has sought to brace the market for rate hikes at least one meeting before making a move via hawkish speeches and votes. The BoE's next meeting is Nov.4 and will feature an updated Monetary Policy Report (not unlike how the Fed releases new staff forecasts in staggered fashion).

However, Bloomberg says that economists expect the BoE will first consider labor market data following the end of the several public assistance programs rolled out in the wake of COVID. They wouldn't want to see an increase in unemployment, but Bailey has said he doesn't anticipate a further increase in unemployment after ending the program (look what government assistance programs have done to the labor market in the US).

Markets are pricing in a 32% chance of a hike at the Nov. 4 meeting, and a 84.9% chance at the BoE's Feb. 3 meeting as investors load up on bets about a faster pace of rate hikes.

According to BBG, the combination of higher energy prices, stubborn supply chain disruptions and climbing wages in certain industries has led senior BoE officials to change their minds about "transitory" inflation. Instead, they now believe inflation is poised to surge without emergency action by the central bank to put the brakes on rising prices.

Last month, the BoE warned it now expects inflation to exceed 4%, double its forecast of 2%.

Saunders made it clear he’s not trying to hint at an exact meeting when the MPC might act. He told the Telegraph "it is appropriate that the markets have moved to pricing a significantly earlier path of tightening than they did previously.”

The benchmark rate is at a record-low 0.1%, but a hike to 0.25% or even to 0.5% would still leave rates in extremely low territory, and still below the 0.75% level from before the pandemic broke out.

Saunders, a former Citigroup economist, was one of two MPC members to vote last month to end the BOE’s bond-buying program immediately. Liz Martins, a senior economist at HSBC who is calling for a hike in February, says she now sees higher chances of a "Christmas" rate hike (the BoE will meet Dec. 16). Even during the September meeting, the BoE acknowledged the strengthening case for a "modest" tightening.

Martins says she believes November is likely too early for a hike because the BoE won't have "any hard data for post-furlough [the government relief scheme] at the November meting." The earliest they could have the data is December, although it might be prudent for them to hold off until January and February to have a fuller picture.

But whatever the BoE decides, independent economist Julian Jessop argued in a tweet that "the economic backdrop and fiscal choices will have a far bigger impact on the public finances than any likely changes in short-term rates...and higher inflation at least keeps real rates low..."


Tyler Durden Mon, 10/11/2021 - 10:30