As is often the case with central bank meetings in the era of communication-as-a-policy-tool, the Bank of England’s “decision†(read: no change) on interest rates was already telegraphed well in advance. But for the always forward-looking markets, there was still plenty to digest from this morning’s BOE statement.
By far the most notable development was BOE Chief Economist Andy Haldane’s decision to dissent in favor of an immediate interest rate increase. Haldane joins MPC members McCafferty and Saunders in voting for an interest rate increase, bringing the vote to a relatively balanced 6-3. For the dissenters, not only were “the benefits of waiting for additional information limited,†but they felt that there may be upside risks to the MPC’s May Inflation Report forecasts for earnings growth and unit wage costs, a possibility we highlighted in yesterday’s BOE Preview report.
The other major hawkish development was the news that the central bank now plans to start reducing the size of its balance sheet when interest rates reach 1.5%, down from the previous guidance of 2.0%. In other words, the BOE now plans to begin unwinding its bond holdings earlier. Rounding out the hawkish interpretation of the meeting, the minutes seemed to view April’s slowdown in manufacturing as temporary. In the wake of the release, the market-implied probability of an interest rate increase in August rose from about 50% to closer to 70%, driving pound sterling higher along with it.
Of course, there are still developments that could impede rate hikes moving forward. The proverbial “elephant in the room,†as ever, is the ongoing Brexit negotiations; it’s worth noting that the BOE’s forecasts assume a “smooth†transition to a new Brexit relationship, so a lack of progress toward that goal could prompt the MPC to stand pat. Interestingly, Ian McCafferty’s term on the MPC expires at the end of August, so that could shift the balance of the central bank’s voters after the next meeting, depending on his replacement.
