MPC stays put on Bank Rate by 7-2, signals removal of some stimulus

Alexander Bueso Sharecast | 14 Sep, 2017 12:04 - Updated: 15:12 | | |


Bank of England signalled on Thursday that it might take back some of its stimulus relatively soon; "in coming months" to be more exact, leading at least a few economists - but not all - to the conclusion that a hike in Bank Rate might be on the cards for as soon as next month.

As expected in financial markets, the Monetary Policy Committee announced that the decision to keep Bank Rate unchanged had been taken by a vote of 7 to 2.

Regarding the outlook for Bank Rate, policymakers at the BoE said that if activity continued to follow the path outlined in the August Inflation Report, then "all MPC members continued to judge that [...] monetary policy "could need to be tightened by a somewhat greater extent over the forecast period than current market expectations."

Likewise, they reiterated that monetary policy cannot prevent the 'real' adjustments the economy was likely to undergo as it adapted to its new trading arrangements nor the hit to real income growth that would likely accompany over the next few years.

However, unlike in August, now "a majority" of the MPC judged that if it looks likely that the economy will continue erode what remaining slack there was, then that would imply "some withdrawal of monetary stimulus is likely to be appropriate over the coming months".

Perhaps tempering those remarks a little, the MPC indicated that what "relatively limited" news had been published on the economy since the last IR was "slightly" stronger than anticipated.

"Overall, the latest indicators are consistent with UK demand growing a little in excess of this diminished rate of potential supply growth, and the continued erosion of what is now a fairly limited degree of spare capacity. Underlying pay growth has shown some signs of recovery, albeit remaining modest."

In any case, that reference to "within months" apparently sufficed to send the yield on the benchmark 10-year Gilt higher by six basis points to 1.20% as of 1416 BST, alongside gains of 1.07% for cable to 1.3349.

Rate-setters also decided to keep the amount of the BoE's Gilt purchases through the asset purchase facility at £435bn and that of corporate bonds at £10bn.

Worth noting, on the heels of the most recent data showing a rise in CPI to 2.9%, on Thursday morning markets were discounting roughly 80% odds of a hike in Bank Rate in February, versus 44% one week ago.

In a preview of the MPC decision, on 8 September, economists at Barclays Research told clients that "despite data and surveys printing on average on the soft side, we believe the MPC will want to react to the recent depreciation in the currency and step-up its hawkish rhetoric.

"Although we believe that a change in tone is likely to wrong foot markets again, they will most likely discount it and maintain very cautious hiking expectations. We also expect the split vote (7-2) on rates to be maintained."

More news

22 Sep Europe close: Stocks finish higher on strong PMI readings

Stocks on the Continent finished mostly higher on the back of strong survey readings on the euro area's manufacturing and services sector and ahead of the German general elections at the weekend, although fresh barbs from Pyongyang were a drag on sentiment.

22 Sep Thousands of steel workers protest ThyssenKrupp merger in Germany

Thousands of steel workers gathered in Western Germany on Friday to protest the proposed merger of ThyssenKrupp and Tata Steel's European operations which was expected to result in approximately 4,000 job losses.

22 Sep London Close: FTSE firmer as pound losses ground after May speech

London stocks had reversed earlier losses to trade a little higher by Friday's close, helped along by a weaker pound as investors weighed up a key speech by Prime Minister Theresa May.

22 Sep JP Morgan Chase to establish global headquarters in Warsaw

Polish Deputy Prime Minister Mateusz Morawiecki announced on Friday that US bank JP Morgan Chase had picked Warsaw to play host to its new global operations centre, bringing thousands of jobs to the region from the beginning of 2018.

22 Sep FTSE 250 movers: Pets at Home dashes higher, oilers also lifted

The FTSE 250 index was on the front foot on Friday, led by retailer Pets at Home and a group of oil-related companies.

22 Sep Theresa May calls for post-Brexit transition period, new security treaty

In a speech in Florence on Friday, Prime Minister Theresa May confirmed that she wanted a two-year "implementation period" post-Brexit and a new treaty with the European Union on security and justice.

22 Sep FTSE 100 movers: Johnson Matthey rallies again but Smiths drops on results

London's FTSE 100 was up 0.6% to 7,305.66 in afternoon trade on Friday as investors mulled over PM Theresa May's Brexit speech in Florence.

22 Sep Results round-up

Saga, the specialist provider of products and services for those over 50, reported solid growth of 5.5% in underlying profits before tax for the first half as it ordered a second new cruise ship amid high demand.

22 Sep US economy shows resilience in face of hurricanes - Markit

Business activity in the US picked up in September despite hurricanes Harvey and Irma, as growth in the manufacturing sector helped to offset an easing in services, according to preliminary data released on Friday.

22 Sep Thalassa suspends share buyback as FairfieldNodal commences due diligence

Thalassa Holdings confirmed the suspension of its share buyback programme on Friday, as a suitor continued to circle the marine geoscience and subsea robotics company.