The whispers about a potential rate hike by the recently hawkish BOE ended up being wrong, when moments ago the Bank of England announced that in a 6-2 decision it kept rates unchanged at 0.25%, largely as expected. Saunders and McCafferty dissented in favor of an immediate interest-rate increase, with Haldane refusing to join the dissenters.
In separate unanimous decisions, the central bank also kept its bond purchase programs unchanged at GBP10BN and GBP435BN for corporate and government bonds respectively.
MPC holds #BankRate at 0.25%, maintains government bond purchases at £435bn and corporate bond purchases at £10bn. pic.twitter.com/ccUHh8b2IG
— Bank of England (@bankofengland) August 3, 2017
The pound tumbled on the news…
… sliding as low as 1.3158, a 0.5% drop, as did 10Y Gilt yields.
While the decision was largely as expected, what has mostly hit the pound is the BOE’s cut of its 2017 GDP forecast to 1.7%, and the trim of 2018 from 1.7% to 1.6%. It also slashed wage forecasts – the bank now sees 2018 wage growth at 3% now (vs. 3.5% in May).
The BOE also announced that it would end term funding drawdown in February 2018 – this may have a small impact upon long term OIS.
As the cable plunged, the FTSE 100 index rose as much as 0.5%, testing its 50-DMA, on the back of the BOE’s dovish U-turn.
The BOE did caution again, however, that “if the economy follows 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 projections.” So far that’s not happening.
The monetary policy statement is below:
