The Bank of England opted to keep interest rates unchanged and maintain their current level of asset purchases at their March policy meeting.
The outcome was broadly expected by markets.
However, the British Pound has jumped since the release of the accompanying statement which reavealed the Bank to still be open to raising interest rates over coming months.
Higher interest rates tend to boost a currency as global investors seek out higher yield on their capital and unfortunately for Sterling UK money markets are unnatractive as the Bank keeps a basic interest rate of 0.25% in place.
The Pound to Euro exchange rate has risen to 1.1518 in the wake of the release, up from today's low at 1.1415. The Pound to Dollar exhcange rate has edged to 1.2363, up from a day's low of 1.2240.
Why is the Pound Stronger?
There was a distinctly more hawkish tilt to the minutes.
“Some members noted that it would take relatively little further upside news on the prospects for activity or inflation for them to consider that a more immediate reduction in policy support might be warranted," read the statement.
"The BoE sounds 'less dovish' rather than the expected 'less hawkish'. Interesting," says Mike van Dulken at Accendo Markets.
Put another way, the tone at the Bank is therefore less pessimistic than many had expected.
"At present, the Committee’s best collective view is that the central judgements underpinning the February projections remain broadly on track, and so the conditioning assumption underpinning the February projections – that there will be some modest withdrawal of monetary stimulus over the course of the forecast period – remains appropriate," reads the Bank's statement.
Therefore, interest rate rises at the Bank must be expected over coming months - this is something Sterling will have liked to hear.
Also adding to the pro-GBP tone was the fact that Kristin Forbes opted to vote for a rate hike, so it was not the whitewash 9-0 vote that many had expected.
"it wasn't a unanimous decision as Kristin Forbes voted for a 25 basis point rise amid concerns over inflation. This caused the pound to jump across the board," says Fawad Razaqzada at Forex.com.
We knew Forbes was growing uneasy with such policy settings, but to vote for a rate hike will have caught markets by surprise.
Recall though that Forbes does leave the bank in June so her pro-rate hike stance cannot be relied on going forward.
Forbes supported her call for higher rates by arguing that inflation would remain above target for at least three years and that domestically generated inflation, global reflation and ‘minimal labour market slack’ posed upside risks to this view.
Moreover "some members" were of the opinion that it would not take much more upside news to justify considering tightening policy, as inflation was rising quickly and evidence on a slowdown in activity was ‘mixed’.
"Hence it is possible that the committee becomes more divided going forwards," says Philip Shaw at Investec. Shaw does however remain sceptical that the Bank will raise rates in 2017.
Market and Analyst Expectations were Wrong
Markets had expected a neutral stance to be struck at their March meeting, much like the Bank’s previous guidance: “Monetary policy can respond, in either direction, to changes to the economic outlook as they unfold to ensure a sustainable return of inflation to the 2% target.”
With no Inflation Report, focus will be on the Monetary Policy Summary.
We warned that if there was to be a more positive, or negative tone adopted by the Bank, then the Pound would move.
Last month, the MPC said that “if spending growth were to slow more abruptly than expected, there was scope for monetary policy to be loosened”.
In light of recent jobs market data that showed real wage growth is indeed slowing, we and others speculated that the Bank could adopt a softer tone which would hurt the British Pound.
"Even with inflation set to rise materially above target over the coming months, we expect the MPC to prove reluctant to change course on policy, particularly with rates of wage growth still subdued and significant uncertainties on the economic horizon," read a note from Lloyds Bank to commercial clients on the matter.
Lloyds were not expecting too much movement in foreign exchange and interest rate markets as a result of today's meeting so the reaction in the markets will have taken them by surprise.
“We see risks that the MPC emphasises this more cautious tone in their economic assessment. Real wages have now started to decline and retail sales growth has pulled back very sharply,” said James Rossiter at TD Securities in his pre-event brief.
TD Securities say household spending accounted for >100% of GDP growth last year’ “there are significant risks that this was spending pulled forward, which could hurt growth this year,” says Rossiter.
The analyst added:
“We see scope for some GBP downside. Rates markets have very much gravitated towards the dynamic that GBP depreciation increases inflation pass-through and the risks of a BoE hike, leaving them vulnerable to any strong message from the BoE that they are less concerned on FX-driven inflation if there is no domestic demand pressure.”
Ahead of the report the Pound to Dollar exchange rate traded at 1.2282.
The Pound to Euro exchange rate traded at 1.1442.
The UK currency has reclaimed some lost ground through the mid-week session amidst a combination of profit-taking on the ever-popular ‘sell the Pound’ trade.
Meanwhile, suggestions that a second Scottish independence referendum will be kicked into the grass by the Scottish National Party have aided sentiment.
Elsewhere, the US Federal Reserve raised interest rates 0.25% at their March meeting but signalled no desire to raise rates on more than two occasions in 2017.
Markets wanted to hear that three or more rate hikes were possible, they sold the Dollar as an expression of this disappointment.