Make your mind up
Sterling wasn’t excessively punished during last week’s monetary policy decision. Despite the majority of the Committee voting to keep rates on hold, including Governor Andrew Bailey, there were three dissenters. It’s not uncommon to have outlying votes even within the small Monetary Policy Committee of the Bank of England. However, those outlying votes typically vote in the same direction, hinting at a slight bias or tilt for tighter or looser policy versus the median voter. Not on this occasion, two votes for further hikes contrasted with one vote for an immediate rate cut. Overall the decision was still seen as relatively hawkish, pushing GBP higher during the session.
Bailey has enfranchised a more open form of governance versus his predecessors. By encouraging an open debate and vote such decisions have become more likely and last week was an opportunity to watch the market’s reaction to such a decision. The hawkish tilt that would have been received by a majority vote to hold rates, with a minority element seeking to raise rates, would have been diluted by the singular vote to cut rates. Overall, the inflation forecasts that were published alongside the decision are what drove markets to moderate their mid-year rate cut expectations. Inflation forecasts showed the bank expecting inflation well above its 2% target. Money market and gilt curves tracked higher at key dates surrounding the May and June meetings.
This was a complex decision for markets to analyse. Yesterday’s sell off in GBPUSD through year to date lows shouldn’t be logically disentangled from last week’s BoE decision. Of course the strong Dollar environment encouraged by Friday’s jobs numbers supported this trend. Weakness within other Sterling crosses serves to support this narrative of a market favouring selling GBP. The Bank of England decision was worded to moderate any emerging bias towards rate cuts. Longer term, the decision is likely to serve to support GBP within its current ranges.
Discussion and Analysis by Charles Porter
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