GBP Dives on Dovish Hike
Sterling tumbled on Thursday after the Bank of England raised interest rates by 0.25% to a post-financial crisis high.
Profit taking seen as MPC doesn’t combine hike with hawkish rhetoric
The hike, which was initially planned for May prior to the first quarter slowdown, has not come without it criticism due to the mixed data, temporary factors driving some numbers and the uncertain outlook, associated with Brexit. It was, however, almost fully priced into the markets with investors correctly drawing on the central bank’s previous views on the labour market and deafening silence as market rates rose in the run up to the meeting.
With markets pricing in more than a 90% probability of a hike prior to the meeting, it left little room for confirmation of it to have an impact. While this did come in the immediate aftermath of the hike, the lack of any apparent hawkish language alongside it or warning that more hikes will follow in the near-term appears to have triggered some profit taking on those pre-meeting positions and possibly even stops being hit after that.
The result is that, despite an initial rally, the pound plummeted shortly after falling back towards 1.30 against the dollar, 145 against the yen and 1.12 against the euro (or 0.89 for EUR/GBP). The central bank were very keen to emphasise though that rate increases were likely to be gradual and limited, citing market expectations of three over the next three years, while also stressing the uncertain influence of Brexit, despite it assuming a smooth transition in its forecasts. All of this lacked the hawkishness that traders were obviously hoping for, which aided the decline in the pound.
Will hike be seen as brave or stupid come March?
I think it’s clear that the BoE could have held off on the decision today until it had more certainty on Brexit – maybe even by November – and avoided the possibility that it will have to do an embarrassing U-turn in the near future. That said, it backed itself into a corner earlier this year and clearly decided it’s a risk worth taking and should negotiations take a turn for the better and the economic data improve as a result, we could look back on this as a brave and calculated move that set us on a path towards policy normalisation.
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