GBP: BoE shift was significant - MUFG

Derek Halpenny, European Head of GMR at MUFG, suggests that there was a crucial shift in stance from the BoE in firstly dropping its signal of cutting rates again and secondly by stating there was a tolerance to the acceptance of an inflation overshoot and that Bank Rate could move in either direction going forward.

Key Quotes

“That to us was the key development that will have a lasting impact on GBP sentiment by injecting some two-way risk into the pound market. No longer can financial market participants assume a laissez-faire/indifferent approach to pound depreciation and the consequences of that in lifting the inflation rate further above the 2.0% target rate. The TWI was roughly 6% weaker relative to the last QIR which resulted in a 0.7ppt increase in the annual inflation rate by the end of 2017 – 2.7% versus 2.0% previously. A repetition of that depreciation would therefore possibly take the inflation rate to well above the 3.0% and based on comments yesterday would possibly be met more by vocal opposition from the BoE. Very quickly, the financial markets would start to price in the potential of a reversal in the BoE’s monetary policy stance.

We believe that will help create a floor for the pound when pound selling is being driven purely by speculation of ‘hard’ Brexit. That trade until now has been viewed as a one-way bet given the belief that the BoE would be indifferent to the inflation overshoot. That is no longer the case which will act to discourage speculative selling at lower levels going forward.”