BoE's Bailey says bank may not go back to giving hard guidance on rates

Bank of England governor Andrew Bailey said on Tuesday that the bank may not return to offering a hard form of guidance, according to Reuters. It is not off the table that we give no guidance at all on rates, with decisions to be made meeting by meeting, the governor added, before stating that the UK labour market it very tight.  

Market Reaction

GBP has not seen any notable reaction to these comments. Markets continue to mull the prospect for a 15bps rate hike from the BoE in December. 

At present, three-month short sterling December 2021 futures (a proxy for where the BoE’s bank rate will be next month) are trading close to seven-week highs at 99.80. That implies that short-term interest markets are only pricing about 10bps worth of tightening at the December BoE meeting or about a 66% chance that the bank hikes rates by 15bps. This time two weeks ago, markets were pricing a 15bps hike with certainty.

Waning confidence that the BoE might hike in December could reflect the slightly more dovish than expected tone adopted by BoE governor Bailey over the weekend, who said that inflation risks were two-sided. There were also comments from dovish-leaning BoE member Jonathon Haskel on Tuesday. He reiterated his expectation that inflationary pressures would ultimately prove transitory and conceded that, if the labour market remained tight, interest rates would have to rise. These comments did not impact sterling at the time.

Perhaps money market reluctance to price a 15bps rate hike from the BoE in December reflects concerns about the pandemic raging in Europe. According to ING, "the vicinity of the UK to the EU, where cases are rising dangerously and new restrictions are being discussed, may be keeping a floor on EUR/GBP”. “Markets could be reluctant to speculate that the UK will be able to dodge another serious Covid wave” the bank added.