The Bank of England caught traders off-guard on Thursday, turning what was expected to be a rather mundane affair into something far more interesting, as two policy makers joined Kristin Forbes in voting for a rate hike.
That took the vote to 5 to 3 in favour of no change which is dramatically closer than markets had anticipated. The belief prior to today’s meeting was that we’ll be waiting until at least 2019 for a rate hike and that policy makers will look through temporary spikes in inflation in the meantime, in favour of supporting the economy. The minutes suggested something very different though, instead suggesting that continued employment growth could suggest space capacity and the central banks tolerance of above-target inflation is being eroded.
While sterling did rally on the news, it has so far failed to break 1.28 against the dollar, having traded around 1.27 prior to the release. While it may still break above there today, it would appear that traders are refusing to overreact to the minutes and there are some good reasons why.
The most obvious is that Forbes is leaving the BoE at the end of the month, reducing the number of those favouring a hike – and possibly the most hawkish – by one. With the economic outlook still challenging, wage growth will likely remain weak which should act as a drag on longer term inflation once the currency impact passes, assuming we don’t see further dramatic shifts lower in sterling.
The one thing that today’s announcement will achieve is that markets will be less complacent going into future meetings and while the BoE may refrain from raising interest rates, should they feel they have to, the markets should be somewhat prepared.
For a look at all of today’s economic events, check out our economic calendar.
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