3 Takeaways from the BOE Meeting Minutes

Why did the British pound return some of its recent wins after the BOE released the minutes of its monetary policy meeting? I’ve summed up the three main points you should take note of:

1. Economic slack weighed on rate hike prospects

Contrary to the upbeat policy forecasts reflected in the previous BOE meeting minutes, policymakers seemed to backpedal when it comes to projecting a potential rate hike before the end of the year. Although MPC members voted unanimously to keep interest rates and asset purchases unchanged for the time being as expected, several market watchers were disappointed to find out that the BOE’s economic outlook is no longer as rosy.

“News about the central outlook for the global economy had been to the downside over the month, and upside risks to activity seemed to have diminished somewhat,” according to the BOE press statement. Recall that BOE Governor Mark Carney himself appeared to shed some of his hawkish feathers during one of his earlier testimonies, saying that there’s scope to absorb more economic slack before interest rates are increased.

2. Focus on wage growth (or lack thereof)

Central to BOE policymakers concerns about economic slack is the lack of wage growth. While hiring has shown consistent gains in the past few months, salaries haven’t been keeping in pace, leading policymakers to worry about lower inflationary pressures down the line.

“Given the contradictory signals from employment and wages, uncertainty about the degree of slack had risen on the month. An argument could be made for putting more stress on the expected path of costs, particularly wages, in assessing inflationary pressures,” according to the minutes. With that, BOE officials and pound traders are likely to be more focused on wage indicators moving forward.

3. Housing gains to slow towards end of 2014

Another factor that led MPC members to rethink their rate hike forecasts for 2014 was the slowdown in the housing sector. Recall that Carney wanted to tighten policy sooner rather than later, as he was also keen to prevent a housing bubble. However, mortgages slipped to an 11-month low in May while the latest Rightmove HPI reflected a dip in house prices.

In fact, the minutes showed that BOE policymakers admitted that the projected pickup in housing was weaker than initially estimated. “Weakening housing market activity might in due course lead to some moderation in house price inflation,” the minutes indicated. 

While the latest MPC discussion doesn’t exactly put the BOE in the dove camp, it does reflect a considerable change in tone from hawkish to cautious.