MNI INSIGHT: Rates Pricing Races Ahead As BOE Sticks To Script

Sterling money market pricing has undergone a dramatic shift to imply more aggressive tightening by the Bank of England, but investors may have read too much into recent comments by policy makers which contained nothing new about the timing or size of future rate hikes.

Market-moving declarations by Governor Andrew Bailey in a video conference on Sunday merely reinforced the message that monetary stimulus has to be unwound, initially via an increase in Bank Rate. "We at the Bank of England have signalled, and this is another such signal, that we will have to act," he said at the G30 Annual International Banking Seminar.

He had made similar points in a speech on Sept. 27, when he noted that the September minutes of the BOE's Monetary Policy Committee showed that despite divergences of opinion over whether to wait and see or act now all members accepted Bank Rate would have to rise.

On both occasions, also, Bailey stressed that monetary policy cannot tackle structural changes in the economy or supply bottlenecks which might be adding to inflation.

HARD TO SQUARE

Despite this absence of novelty, on Monday short sterling markets shifted to fully pricing in a 15-basis-point hike in November, another 25 basis points in December and then further hikes in February, June and before the end of 2022, lifting the policy rate from its current 0.1% to 1.25% by the end of next year.

When policy is at a turning point money markets tend to be more volatile, and the latest repricing is hard to square with remarks by Michael Saunders, seen as the most hawkish MPC member, who in a Daily Telegraph interview published Oct. 9 said market rate expectations appeared appropriate. At the time, markets were fully pricing in a hike in February, and half-pricing in an increase in December.

While there are clear divisions between MPC members, the gap between the more and less hawkish members may not be that large.

In a Euro50 Group video conference before Bailey's latest comments, MPC member Catherine Mann said market tightening of financial conditions allowed her time to wait before sanctioning a rate hike. She also noted upside risks to her inflation outlook, from sterling depreciation and UK firms' pricing power.

The boom in video conferences has given the Bank a communications challenge. Often no official transcript is published of remarks by policymakers who attend and the context of their comments can take time to filter through. The Bank normally uses set piece speeches and publications for policy announcements.

With markets febrile and policy at a turning point, effective tightening in monetary conditions seems to be racing ahead of tightening guidance.