BoE strikes hawkish surprise amid ‘unprecedented’ second round of voting
The Bank of England has struck a hawkish surprise. In an extraordinary turn of events, the vote on rates was unexpectedly gridlocked, and an unprecedented second round of voting was required in order to reach a majority decision - a first since the inception of the MPC in 1997. Market participants had braced for no more than a couple of dissenters in favour of no change, and it's safe to say that the razor-thin 5-4 vote has turned a few heads.
The bank’s remarks also hint at little rush to lower rates again. Any future cuts will be both “gradual and careful”, with policymakers appearing far more concerned about elevated consumer prices than they are about the state of economic activity or the labour market. Forecasts for inflation were upped and, interestingly, so was the bank’s growth projection for 2025.
Sterling has posted modest gains, as investors slash bets in favour of additional cuts, with a November rate reduction now less than 50% priced in by swap markets.
This presents a double-edged sword, as while the prospect of higher rates for longer should buoy the pound, a reluctance to ease policy could inflict further damage on Britain’s already fragile economy.
Author
Matthew Ryan, CFA
Ebury
Matthew is Global Head of Market Strategy at FX specialist Ebury, where he has been part of the strategy team since 2014. He provides fundamental FX analysis for a wide range of G10 and emerging market currencies.
