Date: 16 Jun 2017
The Bank of England Monetary Policy Committee (BOE MPC) may have voted 5-3 to keep UK rates unchanged on Thursday but the decision by Ian McCafferty and Michael Saunders to join Kristin Forbes in voting for a UK rate hike on Thursday was undoubtedly a shock. The pound rallied, gilt yields rose and short sterling contracts for December of this year moved 6 basis points, raising the likelihood attached to a rise in the bank’s main interest rates before the end of 2017. The question for traders is whether the impact of the 5-3 vote will have more than a fleeting impact.
Dutch bank ING wrote that “the post-election rise in domestic political – as well as Brexit policy – uncertainty should arguably have led the Bank [of England] to retain a more cautious tone at this meeting” and that some might suggest “that it is a tad irrational for some MPC officials to consider hiking at this stage – especially given that the cost of above-target inflation doesn’t outweigh the long-run growth uncertainties stemming from Brexit.” But they weren’t more cautious and 3 of the MPC did feel it was right to vote for a rate hike. And traders on the day had to deal with that outcome.
Going forward however, traders may wish to bear in mind, as ING points out, that Thursday’s 3 “hikers” were external appointees to the MPC with the 5 drawn up of existing Bank of England employees. ING feels that past MPC history suggests the “insiders” tend to carry the day and as such the Dutch firm does not “think GBP markets are likely to buy into these hawkish calls once the dust settles and evidence of a slowdown” in the UK economy gains traction.” Traders will make up their own minds but ING’s economists believe “the knee-jerk GBP move higher could prove to be short-lived” and their currency analysts feel “the near-term risks to GBPUSD lie towards 1.24-1.25” with a 0.88-0.90 range in EURGBP “likely over the summer period.