At this morning’s Bank of England rate decision, the Monetary Policy Committee voted 6-2 to hold rates flat at .25% while also cutting growth forecasts for the next year and a half. This would be fewer dissenting votes than what was seen at the last BoE rate decision in June when three votes showed up in favor of hiking rates. That previous vote, of course, was in response to the rising inflation that’s currently showing in the British economy, and within the meeting minutes from today’s rate decision, it appears as though the Bank of England is trying to proactively address this a potential issue.
GBP/USDÂ Hourly: Cable Breaks Bullish Trend Channel after Dovish BoE
Chart prepared by James Stanley
Within the minutes, the BoE said: “If the economy were to follow a path broadly consistent with the August central projection, then monetary policy could need to be tightened by a somewhat greater extent over the forecast period than the path implied by the yield curve underlying the August projectionsâ€.
This sounds very much like a bank warning that rate hikes may be on the way in response to inflation. As we’re currently seeing in Europe, markets won’t necessarily wait around for the Central Bank to wave the white flag on inflation. As inflation begins to rise, markets and investors build-in the expectation that tighter policy options might be on the horizon. This has led to ‘taper tantrum’ scenarios as bond markets that have been bid by Central Banks over the last nine years prepare to lose one of the market’s biggest buyers as inflationary forces begin to show.
But the fact that the ECB has been evasive about this issue has allowed market participants to creatively model future scenarios. This largely expects that the ECB would first exit from stimulus to make policy ‘less loose’, followed by the hiking of rates to further tighten policy. This is likely why we’ve seen that runaway move of strength in the single currency this year, as markets are pricing in a full-scale change at the ECB at some point later in the year. But also within this morning’s meeting minutes is a line that appears as though the BoE wants to ward off any potential taper tantrum scenarios by saying: “All members agreed that any increases in the Bank Rate would be expected to be at a gradual pace and to a limited extent’.
