The Bank of England gave the British Pound a boost on Thursday, March 16 when the results of the Monetary Policy Committee’s March meeting were revealed.
Markets went into the event expect the Bank to strike a gloomy tone with a full 9-0 vote being delivered in favour of keeping rates unchanged.
This assumption was misguided it turns out.
Catching attention is outgoing MPC member Kristin Forbes (above) who voted to raise interest rates. She leaves the Bank in June and clearly feels unshackled, thus allowing her to go against consensus.
The minutes of the meeting also flagged that for some other members it would take “relatively little” upside news on growth and inflation for a more immediate tightening of policy.
The promise of higher interest rates in the UK over the course of coming months, convinced investors to buy a cheap Pound.
Analysts are however wary of reading too much into the Bank’s tone.
Daniel Vernazza, Lead UK Economist at UniCredit Research in London warned that this hawkish tone “won’t last.”
“In our view, however, there exists a comfortable majority on the MPC that has little or no desire to tighten policy anytime soon and, moreover, the likely slowdown in UK economic growth amid a squeeze on real incomes and Brexit-related uncertainty should quash any further dissent. We continue to expect the MPC to keep the stance of monetary policy unchanged for the rest of the year,” says Vernazza in a note to clients seen by Pound Sterling Live.
Sharing this scepticism is Philip Shaw at Investec:
“Overall Sterling rose in response to the minutes while the yield curve steepened. Even so, interest rate markets are not fully pricing in a 25bp hike in the Bank rate until the back end of 2018. In the absence of unexpected resilience in the economy or a notable pick up in wage growth, we suspect that the first move might well even occur beyond then.”
Shaw is wary that there are no signs that wage growth in the UK is gathering pace - something that would be required to prompt the Bank into action.
In fact, and as the minutes pointed out, January’s earnings data were relatively soft.
The MPC has increased its ‘nowcast’ of Q1 GDP to +0.6% from +0.5%.
Part of this seems to reflect the continued resilience of survey indices (especially the PMIs) despite indications of a moderation in retail spending.
“While of course the BoE could be correct, we would point out that the services PMI excludes retail sales (and other distribution) which would not directly pick up the overall effect of softer high street activity,” says Shaw.
The Bank ended its event by reminding markets that it will continue to pay close attention to upcoming data releases.