Market response to September's BoE MPC policy statement and minutes - Westpac

"The 7-2 decision to leave policy unchanged was almost universally as expected. However, there was a significant change in the tone of the MPC’s minutes," notes Westpac analyst Timothy Riddell.

Key quotes:

"The MPC's comment that, if the economy unfolds as the Inflation Report forecasts, the market is under-pricing the potential path of withdrawing stimulus may not be new, but the persistent referrals to slack being eroded in various sectors of the economy underscored a shift towards withdrawing the emergency stimulus seen in the aftermath of the Brexit-vote."

"The stressing that this was the view of “all members” added to its previous pertinence."

"The minutes and statement referred to recent data being firmer than the August Inflation Report’s forecasts and projections, though this was qualified by there not being a lot of data since August and, as always, they remain dependent upon more data to affirm this potential lift in activity."

"The minutes pointedly added (paragraph 34) that a majority of MPC members considered that continuing on a path similar to the growth projections within the August Inflation Report would imply “that some withdrawal of stimulus was appropriate over the coming months”."

"The MPC continue to highlight their caveats over weak consumer confidence and evidence that household finances, low real wages and Brexit uncertainty are weighing on consumer activity. The uncertainties of Brexit also cited as leading to the current low levels of business investment."

"The MPC stated that they would be monitoring surveys on consumer confidence and business investment which they appear to see as the clearest hurdles towards the potential path of withdrawing accommodative policy."

Market interpretation and reaction

"FX and rates markets quickly responded to clearly more evident bias to withdraw policy."

"The reference to “coming months” with respect to potential withdrawal means that the November MPC meeting is now seen as potentially live for a shift in policy."

"First of all, there is no MPC meeting in October. Secondly, the current minutes referred to the prospect of updated forecasts and projections within the next Quarterly Inflation Report which will be available for the MPC at their November meeting and will be simultaneously published with their next policy statement and minutes on 4th November, with a Press Conference to follow."

"The SONIA curve lifted further to imply a 50%+ chance of a November withdrawal of the post-Brexit-vote 25bp cut. The chart below shows how the curve has lifted since the beginning of September."