Deciding not to decide
Just because there isn’t a rate decision in the UK due for some three weeks yet hasn’t stopped interest rates having a decisive impact upon Sterling crosses in the FX market. In fact, the weeks between monetary policy decisions present opportunities for many policy makers to give speeches or publications where they may often voice their mind far more freely than they are permitted to in their often heavily scripted press conferences. Such speeches often give the opportunity to see the position that non-Chair internal and external members of the monetary policy committee hold on the expected path of monetary policy. Sometimes, however, even the speeches of more central decision makers within central banks provide a narrative that somewhat catches the market out.
Yesterday was one such day. Andrew Bailey, Governor of the Bank of England spoke and commented quite directly and purposefully upon the change in market pricing of UK rates over the past month. The economic paradigm that we have been living with so far in 2023 has been one of rapid US inflation and rising US interest rate expectations. This has often done one of two things: either it has dragged rate expectations for the Eurozone and UK higher or it has served to highlight the juxtaposition between transatlantic economic outlooks. Ultimately it seems the logic of dragging UK rate expectations higher despite contrasting with the UK’s data publications has won over. This logic seemed to be the target of Governor Bailey’s comments yesterday.
He commented that he sees little justification for the upgrade to terminal rate forecasts in the UK by some 0.5% since the beginning of February. Rates had been priced following the last BoE rate decision to hit 4.25% by summer before falling back at the end of 2023 / start of 2024. Speaking yesterday, implied yields on traded paper stood at 4.75%. The headline comment from the Governor was that the central bank no longer sees it as a given that rates must rise further from their current 4% level. The Governor was careful not to show that this does not mean the BoE will not raise rates, just that further hikes are not a foregone conclusion, let alone the two that the market is pricing. Rate expectations fell on this news with Sterling also taking a belated leg lower during the European afternoon trading session. The losses didn’t last long on bond yields or Sterling with the market still stubbornly holding onto its outlook for the central bank. We have a further BoE MPC speech today from chief economist Huw Pill to look out for and made all the more salient due to yesterday’s speech from the Governor. Similarly, with Jeremy Hunt’s budget due to take place between now and the next monetary policy decision, Sterling is primed for a significant directional move upon even slight changes in sentiment.
Discussion and Analysis by Charles Porter
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