MNI INSIGHT: Emergency Hike Out Of Character For BOE

Markets are alive with chatter about an emergency Bank of England rate hike following the plunge in sterling and gilts, but such a move would be out of character for the BOE, which aims to set policy based on a full appraisal of the economic outlook and has no interest in defending particular exchange rate levels.

Sterling hit an all-time low on Monday in response to Friday’s government announcements of unfunded spending and tax cuts, but, while the BOE would act to ensure market functioning it has no mandate for defending the currency. It is theoretically possible that Chancellor Kwasi Kwarteng could instruct the Bank to buy sterling, but the UK’s last attempt at intervention, when it defended the pound’s membership of the European Exchange Rate Mechanism in 1992, ended in expensive failure and its current stocks of international reserves would not long survive any tussle with speculators.

Only in the event that selling became unidirectional, prompting liquidity shortages in sterling markets, would the Bank’s markets division feel obliged to step in, as market maker of last resort. But there appears to be no evidence of this so far, with the repricing of gilts appearing to be a response to what is perceived as adverse economic news. (See MNI INTERVIEW: Gilt Sales Target Short-End Liquidity: UK DMO)

NOVEMBER MEETING

The BOE’s Monetary Policy Committee stated at its September meeting that it would make a full assessment of the impact on demand and inflation of the government's plan for growth "as part of its November MPC round.”

To hurry into an emergency hike now would require a U-turn in policy communication and also expose the MPC to charges of trying to defend the currency.

There would seem to be little reason for even BOE hawks to argue for such a move. Recently, at an MNI event, Catherine Mann, who voted for a 75-basis-point hike in September, explicitly rejected the idea that she favoured more aggressive rate setting in order to defend sterling, pointing out that faster tightening now in her model did not feed through to a stronger exchange rate throughout the forecast period.