© Pound Sterling Live, Bank of England
The Bank of England has said it may need to raise interest rates faster than was previously thought. Analysts give their views below on when it may actually move and what this means for the Pound.
The Pound has risen against all of its G10 rivals during noon trading Thursday after the Bank of England told markets that it might raise interest rates faster than was previously thought, thanks to stubbornly high inflation and a stronger than expected economic performance from the UK.
Bank of England rate setters voted unanimously to hold the UK's cash rate at 0.50% for the month of February but warned in their accompanying statement that a faster pace of rate hikes will be necessary if the bank is to return inflation to its 2% target over the next two or three years.
"The Committee judges that, were the economy to evolve broadly in line with the February Inflation Report projections, monetary policy would need to be tightened somewhat earlier and by a somewhat greater extent over the forecast period than anticipated at the time of the November Report, in order to return inflation sustainably to the target."
Sterling rose by more than 1% against developed world rivals like the US Dollar, Euro, Japanese Yen, Canadian Dollar, Australian Dollar and New Zealand Dollar in response to the statement.
Thursday marks the first time the BoE has revisited its inflation forecasts since November, when raised the bank rate for the first time in a decade as a result of rising inflation that had been brought about by the post-referendum devaluation of Sterling.
Pricing in interest rate derivatives markets, which enable investors to protect themselves against changes in interest rates, had assigned only a 50% probability to the idea of a rate hike coming in May of this year before the BoE's announcement Thursday.
Those odds will almost certainly have changed over the course of the London afternoon and could lead to even further gains for Sterling as they become more widely known.
Meanwhile, analysts are giving their views below on when they think the Bank of England will take the plunged by raising rates again and what this could mean for the Pound during the months ahead.
Viraj Patel, FX Strategist, ING Group
"The Bank of England's Brexit-contingent hawkish signal today means meaningful GBP upside may be slightly tempered in the near-term. We expect full upside potential to be unleashed once we get greater clarity on a Brexit transition deal."
"With our base case that a Brexit transition deal will be agreed, we continue to see deferred gains for the pound – and reaffirm our 1.45 target for GBP/USD. Indeed, based on what we see as four misconceptions in GBP markets right now, we still think there is scope for a positive UK story to drive GBP/USD higher over the medium-term."
"Investors looking for tactical opportunities may see greater value in EUR/GBP downside - given the looming Italian elections and prospect of some more cautious ECB currency talk. We're looking for a move to 0.86 in 1Q18."
Ned Rumpeltin, European Head of FX Strategy, TD Securities
"With the Bank of England adopting a more hawkish posture at this MPC, we expect markets to converge to our expectation of a rate hike in May."
"Upgrades to the growth outlook combined with inflation projections that remain above target at a three-year horizon point to an increasing probability of higher policy rates in the months ahead."
"With the USD in the midst of a broader correction, we favour EURGBP over cable to express a more positive near-term outlook for sterling, particularly as EUR hard data surprises may have peaked."
Paul Hollingsworth, Economist, Capital Economics
"The “Super Thursday” releases from the Bank of England support our long-held view that the Monetary Policy Committee would become less dovish as the economy beat expectations."
"Indeed, we expect the next hike to come in May and, with the MPC wanting to bring inflation back to target over a shorter time horizon than before, we still think that interest rates will rise more than markets expect further ahead."
"Our view is that today’s releases pave the way for an interest rate hike in May. And we are sticking to our view (made in September last year) that the MPC will hike interest rates three times in total this year, taking Bank Rate to 1.25% by the end of this year. We envisage two further hikes in 2018, leaving interest rates at 1.75%."
Kallum Pickering, Economist, Berenberg
"That the BoE did not seek to shift the market pricing away from May, which showed a c50% chance of a hike before today’s meeting, is a de facto confirmation that the bank is satisfied with the way the market views the timing of the next hike. Since the meeting the market pricing has risen to 70%."
"The BoE is becoming less concerned about Brexit risks to near-term demand relative to the risks of the ongoing overshoot of inflation relative to the 2% target."
"The BoE’s new growth forecast averages c1.75% over the forecast horizon; well above the BoE’s estimate of potential supply growth (c1.5%)"
"Today’s communication from the BoE, which gives a nod to the new market pricing of three hikes in three years, is now broadly in line with our view and the new market pricing. We thus see a high probability that the BoE hikes by 25bps in May, followed by another 25bps hike in November, with at least one further hike in 2019."
"The risks to the outlook for a gradual monetary tightening depend on the outlook for wage growth. Continued tight labour market conditions point to rising nominal wage growth toward 3% by late 2018 from current rates of around 2.5%. We expect the BoE to tighten by more (or less) than our base case if wage growth surprises to the upside (or downside)."
Daniel Vernazza, Chief UK Economist, UniCredit
"The MPC voted unanimously to keep the stance of monetary policy unchanged, but on many dimensions the MPC was substantially more “hawkish” than expected."
"We keep our forecast for the MPC to remain on hold this year, as we expect growth and inflation to be weaker than the MPC expects, but risks are increasingly skewed towards an earlier hike, possibly as soon as May."
"The main uncertainty surrounding the economic outlook is how businesses and households react to progress in Brexit negotiations."
"In addition, the November rate hike is still working its way through the economy and there are signs that the pace of slowing in the housing market has accelerated, with mortgage approvals dropping sharply in December and the Halifax house price index falling for two consecutive months."
"In our view, this provides sufficient reason for caution. But, as we have previously flagged – and in light of today’s “hawkish” Inflation Report – the risks are increasingly skewed towards an earlier hike, possibly as soon as May."
Georgette Boele, FX Strategist, ABN Amro
"We now see the BoE hiking twice this year (May and November) before hiking another two times in 2019. We previously expected the central bank to leave interest rates on hold this year, before hiking twice next year."
"Based on market pricing of a Bank Rate of 0.7% at the end of this year and 0.9% by the end of next year, economic growth is seen remaining above trend and inflation above target over the coming years."
"Indeed, GDP growth is projected to settle at 1.7-1.8% to 2021, compared to the Bank’s view of trend growth at
"Meanwhile, inflation is seen at 2.2% two years from now and 2.1% three years from now, above the inflation target of 2%. All this suggests that the BoE needs to tighten faster in order to ensure that inflation gets back to target over the medium."
Michael Metcalfe, Global Head of Macro Strategy, State Street
"Markets had moved quickly this year to discount more tightening from the BoE. The hawkish tilt of this meeting will at the very least, vindicate these moves and possibly encourage further expectations."
"What will be key now is to watch how sterling responds, as a much quicker appreciation could produce a faster fall in inflation and potentially nullify the need for a more rapid tightening cycle.”
Barry McAndrew, Portfolio Manager, State Street
“Today’s hawkish tilt reinforced what the market had already priced in since the last meeting. Market expectations had increased to three hikes over the next three years rather than the two guided by the BoE in November. Data has been a little brighter in places, although dampened by Brexit negotiations."
"The BoE is showing more confidence that a faster pace of hikes is warranted, but runs the risk that recent sterling strength accelerates. This in turn could warrant a more neutral stance by the summer than today’s guidance.”
Tim Riddell, Macro Strategist, Westpac
Markets are already suggesting that “May is in play” by lifting their pricing for a 25bps rate hike in May to over 70% and also following the BoE’s projections for rates to lift 3 times (from prior 2) to 1.25% into 2021.
The key comment that markets picked up on was that rates would likely rise earlier and faster than previously anticipated.
Markets are now pricing in some 70% chance of a 25bps rate hike in May, from 50% pre-meeting and around 35% a month ago.
Jacob Deppe, Head of Trading, Infinox
“The Bank of England has struck a significantly more hawkish tone compared with three months ago, which appears to be largely related to global inflationary concerns."
“Where inflation was imported from abroad as a result of the weak Pound in the immediate aftermath of the Brexit vote, now inflationary pressure is building from all sides thanks to global economic growth."
"In November the expectation was that the interest rate hike was a ‘one and done’ affair. Now it seems we could face two rate hikes this year: one in May and another in the Autumn."
“Not everyone is convinced two rate hikes is the way to go, expect some market participants to play the other side of this trade."
“Bank of England governor Mark Carney is probably looking to give the Bank some buffer with interest rates, providing room to cut when Brexit goes through next March."
“Of course, this could simply be Mr Carney playing with the markets again and raising expectations only to change his mind later. He has, after all, done it several times before.”
Anthony Kurukgy, Senior Sales Trader at Foenix Partners
"Despite the unanimous 9-0 vote to keep UK interest rates on hold at 0.5%, Governor Carney appeared more hawkish in his quarterly Inflation letter to the chancellor and subsequent press conference this afternoon, fuelling expectations that the Bank of England is leaving open the possibility of raising the cost of borrowing as early as May."
"As growth forecasts continue to heat up across the globe, the Bank of England must now factor in the bigger macro picture and knock-on effect that the latest upward revision may have on its own economy."
"The UK’s central bank and its policymakers will have a lot more than just Brexit clarity to contend with in the coming months, as the futures market now looks to price in monetary tightening sooner rather than later."
David Lamb, Head of Dealing at FEXCO Corporate Payments
“Elon Musk isn’t the only one blasting things into orbit this week. The Bank of England has done a fine job of sending sterling into the stratosphere too."
“Such an unexpectedly hawkish tone from the Bank’s rate-setting committee relegated today’s unanimous decision to hold rates into irrelevance."
“For Poundwatchers, it’s the future course of interest rates that matters, and such an unambiguous hint that rates will be rising sooner than previously thought has put the Pound on helium – and it has floated back up to its highest level of the week against both the Euro and the Dollar."
“The Bank’s hawkish stance is all the more surprising given its prediction that inflation will fall of its own accord, meaning there is less need for higher interest rates to rein in inflation."
“In part the easing in inflation is thanks to the Pound’s recovery in January. With today’s decision attaching rocket boosters to sterling once again, we’re in that rarest of situations – a virtuous circle where the strong Pound is increasing the likelihood of further strengthening."
“While the prospect of more expensive borrowing for homeowners will have a cooling effect on the UK economy, for now the Pound is making hay while the sun shines.”
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