Viraj Patel, Foreign Exchange Strategist at ING, explains that while they didn’t quite see a third rate hike dissenter at yesterday’s BoE meeting, the statement’s clear reference to a majority of MPC officials seeing a withdrawal of stimulus as ‘appropriate over the coming months’ was probably as effective a signal the Bank could have sent to engineer a slightly steeper a UK rate curve – while retaining the legitimacy of the MPC process.
“It is worth bearing in mind that the main objective of the Bank’s hawkish signal was to realign markets with the notion of a gradual BoE tightening path, rather than prepping investors for an imminent rate increase. A November rate hike shouldn’t be viewed as a sure fire bet; we suspect that it is largely conditional on two factors: signs of a rebound in domestically generated inflation (namely wage growth) and a reduction in short-term political uncertainty. Indeed, overarching the BoE’s policy reaction function is the assumption of a “smooth” Brexit adjustment and we expect political events over the next month or so – not least PM May’s key Brexit speech next Friday in Florence – to significantly test this thinking. Even if one were to look through the near-term political risks, we believe any BoE-fuelled GBP rally may be on its last legs.”
“A ‘withdrawal of stimulus’ hiking cycle could, at best, lift the UK rate curve a further 25-30bp higher in the near-term – which may only offer the pound a one-time boost. Our model-based estimates suggest that GBP/USD could run up to 1.35-1.36, while EUR/GBP could extend its move lower to 0.8750-0.8800. Both near-term political uncertainty and louder BoE forward guidance over a shallow hiking cycle (note MPC dove Vlieghe speaks today) means that we are content with our forecasts for EUR/GBP at 0.90 and GBP/USD at 1.33 by end-2017.”
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