BoE sets glacial hike projections - AmpGFX

The market had a glacial pace of hikes priced-in for the UK over the next three years, and the Bank of England Inflation Report largely reinforced these expectations, according to Greg Gibbs, Analyst at Amplifying Global FX Capital Pty Ltd.  

Key Quotes

“Two of nine MPC members dissented from the hike and appear to reflect market expectations that inflation pressures (beyond that driven by GBP depreciation) will remain subdued, notwithstanding a 42-year low in the UK unemployment rate.  Like the USA, the market appears to feel more comfortable with rates below the central bank’s rate projections, and the immediate market response was to drop 2yr UK rates by around 7bp.”

“The BoE is hiking not because the UK economy is all that strong; in fact, it is significantly under-performing G7 and its trading partners’ growth. The Bank is hiking because it appears that potential output growth is equally subdued.  There appears to be limited slack in the economy, and its modest growth outlook is still expected to gradually use up what little slack may be left, increasing domestic inflation pressure.  There is elevated uncertainty over the direction of UK rates reflecting the range of potential Brexit negotiation outcomes, UK political uncertainty, and a lack of historic guideposts to assess the current state of the UK economy and how it has already reacted to Brexit uncertainty.”

“The GBP is already historically cheap, and its fall since the Brexit referendum is consistent with its relatively sluggish economic performance. It remains difficult to assess its future direction, but the market’s rate outlook is subdued, and it appears to have priced-in tough times ahead for the UK economy.”