BoE chomps at the bit but the market is moving on

Serial dissenters strike again

The Monetary Policy Committee equivalent of chomping at the bit to tighten was evident from two unexpected votes to raise rates following Thursday’s meeting. The dissenters had been amongst the least notable MPC members in recent months though their decision to put their heads above the parapet on Thursday was not a complete surprise. External MPC members Michael Saunders and Ian McCafferty also dissented in August, bringing some speculation they might repeat the double act at some point. As such, there was less of a sting to sterling pricing in reaction. Sterling traded against the dollar was able to spike to a fresh seven-week high though it soon settled around 100 pips lower. It remained elevated relative to earlier in the month. Against the euro the pound made a similarly short-lived move to the highest levels since January but then retreated by 60 pips. In short, a May rate rise remains all but certain, but the market had largely priced it before Thursday.

Lack of urgency

Crucially, whilst doing nothing to alter signals of a fresh 25 basis point at its next meeting, the committee flagged a lack of urgency in telegraphing moves beyond that. Future increases “would be gradual and limited” the MPC’s statement said. Nor was much there concern on the committee over the newly contentious issue of international trade. Imminent U.S. tariff announcements were likely to have a limited impact, according to the statement, even if any eventual rise in protectionism would have a “significant negative impact”.

Points of omission not commission

The only other standout point was commentary on wages, and it was made by omission rather than commission. A note about firming wage data providing “increasing confidence” of a labour cost pick up was fairly unremarkable. But it was made more notable by the committee dropping the reference to the “coming months” for “gradual” and “limited” policy adjustments. Wording that narrowed the timing of hikes was also present before rates were raised in November. Losing such wording at this stage could be another caution—admittedly a mild one—that market pricing is beginning to reach the limits of projected tightening. As stated, a May rate rise now looks fully priced. Markets—particularly sterling—will soon need fresh evidence of resolute MPC intent or further progression of EU negotiations to hold current ground.