MNI BOE WATCH: BOE Hikes 50bp,Market Bets On Peak Little Moved

The Bank of England delivered a larger-than-expected 50bps hike at is June meeting but did not alter its guidance and markets largely shrugged off the news, with no change in the anticipated rate peak.

Analysts had been united in predicting a 25-basis point- hike but the Monetary Policy Committee instead raised Bank Rate to 5.0%. With uncertainty over whether the majority on the Committee had effectively chosen to bring forward tightening rather than embark on a more hawkish path, reactions were subdued, with the market implied rate peak sticking close to 6%.

Seven of the nine MPC members voted for the 50 bps hike. One of the two who opposed it and instead backed unchanged rates, Silvana Tenreyro, is now at the end of her term, suggesting that dovish dissent is fading away.

The MPC collectively stuck to the line that “if there were to be evidence of more persistent (inflation) pressures, then further tightening in monetary policy would be required.”

DATA DEPENDENT

This data-dependent approach leaves the door open to further sharp financial market reactions to key indicators, with the minutes noting that market pricing appeared to be more sensitive to data outturns than over the previous decade. (See MNI POLICY: BOE Hikes Whilst Seeking New Inflation Model)

Since the MPC’s May meeting market implied rates based on the one-year OIS have risen by 140bp in the UK compared to 40bp in the eurozone and 80 in the U.S., the minutes noted.

The UK growth outlook remains subdued with Bank staff estimating that second quarter underlying growth would be flat and that it was reasonable to assume 0.25% expansion on the quarter in the third.

The significant news in recent data for the majority on the MPC came from signs of more persistent inflation pressure stemming from a tight labour market and resilience in demand, with upside surprises in wage growth and service sector inflation helping to justify the 50bp hike.

The minutes offered no steer on the tactical approach of the MPC to tightening and with no fresh forecasts in June and no press conference the uncertainty around the approach to future tightening remained high.