BOE Silence Tells Markets They're Right on Odds of May Rate Hike
(Bloomberg) -- The Bank of England is signaling that investors have it right when it comes to the likelihood of a May interest-rate hike.
Officials, who kept the key rate at 0.5 percent at March’s meeting, acknowledged on page one of their minutes that markets are pricing a 90 percent chance the next decision will be to increase borrowing costs. Importantly, they made no attempt to question that view throughout the rest on the document.
That silence effectively endorses the investor outlook, given that policy makers have in the past used the minutes to push back against the market’s assessment. Two of the nine Monetary Policy Committee members, Ian McCafferty and Michael Saunders, said rates should have risen immediately.
A May increase would put the BOE firmly on a tightening path as it attempts to tame inflation, after it raised rates for the first time in more than a decade in November. While the bank intends to move slow enough to avoid rocking the economy, the signs are that slack has been used up and wage growth is accelerating.
Another hike this November is now seen by investors as having about a 56 percent probability. At the end of last year, markets predicted barely even one quarter-point increase over the whole of 2018.
What Our Economists Say:“Sometimes silence is golden. We see the lack of any pushback against market expectations as a tacit endorsement of a May hike. We expect the MPC to deliver at its next meeting.”
--Dan Hanson and Jamie Murray, Bloomberg Economics
Governor Mark Carney said in February that the BOE is unlikely to hold investors’ hands in the manner it had previously. Back in September, officials included a reference to a rate increase in “coming months” specifically to force markets to shift their view.
The economy is currently evolving largely in line with the bank’s forecasts, which show excess demand will emerge by 2020 and that inflation won’t return to the 2 percent target for the next three years. The projections will be updated in May.
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U.K. data this week has showed inflation slowed to 2.7 percent in February as the effect of the pound’s Brexit-referendum fueled decline faded. Even so, signs of domestically generated price growth are mounting and wages are picking up, suggesting consumer spending may strengthen.
The MPC said on Thursday its “best collective judgment” was that an ongoing tightening of monetary policy over the forecast period would be appropriate. “All members agreed that any future increases in bank rate were likely to be at a gradual pace and to a limited extent,” the minutes showed.
The slim chance that rates will stay on hold in May was reflected in the BOE’s attention to the U.K.’s decision to leave the European Union, and to U.S. President Donald Trump’s plans to impose import tariffs.
Brexit developments remain the greatest influence and source of uncertainty over the economic outlook, while any increase in protectionism could have a “significant negative impact” on global growth and put upward pressure on inflation.
Still, the BOE stays a part of the global trend toward the end of easy money. Its decision comes a day after the U.S. Federal Reserve, under new Chairman Jerome Powell, raised interest rates for the sixth time since 2015. China followed suit by stepping up borrowing costs. The European Central Bank is considering whether to bring a halt to its bond-buying program this year, putting it on track to start raising rates in 2019.
“The committee is saying ‘we are aiming to raise rates again in May,’” said Philip Shaw, an economist at Investec. “The fact that we had two dissenters, both looking for a rate hike, really paves the way for a smooth transition to higher rates.”
©2018 Bloomberg L.P.