BoE reaction: Gap opening between vote and rhetoric – GBP gets boost

The Bank of England's 6-3 vote to hold is a mild hawkish surprise, though we would not read too much into Catherine Mann's defection. The more important story is the gap opening up between the vote and the tone of the bank's rhetoric - remarks pointing to clear signs of disinflation and little evidence of second-round effects read considerably more dovish than the vote split suggests. This mismatch is unusual and, in our minds, points squarely to a stark divide between the hawks and the doves on the committee.

Indeed, the MPC now sees inflation peaking much closer to 3% than 4% this year, which we don't think is high enough to warrant undue panic or force the bank's hand. The hawks will argue, of course, that the spike in energy prices warrants pre-emptive insurance tightening, though that argument only really holds if the shock threatens to feed into underlying inflation, and it doesn't appear as though the majority of the committee believes it will.

Sterling has received a mild boost as markets move to price in a hike towards the end of the year. We're not convinced this will come to pass, and these bets could unwind pretty quickly should we see a peaceful resolution to the Iran conflict. Worth noting too that the MPC has already flagged tighter financial conditions as doing some of the heavy lifting, and a further sell-off in gilts would only reduce the need for the committee to act itself.