You may recall that the last Bank of England decision caused some upset within GBP crosses. It was the first decision in quite a while when the Committee was reduced to an eight-strong vote rather than its usual nine members, but it was specifically the absence of its increasingly hawkish Chief Economist Andy Haldane that appeared to change the balance of the Bank’s rate setting board significantly. The outgoing chief economist was one of two, arguably three, voices highlighting the risk that future inflation presented to the UK recovery from the pandemic. He highlighted the asset purchase programmes and ultra loose monetary policy in general as the driver of those risks and was a strong voice arguing for the wider normalisation of policy sooner rather than later. Not one to flip-flop around..
His absence from the board was expected to encourage other members who had thought to have grown more sympathetic to this view to fill his place and be a voice for normalisation. The vacuum however was left unfilled with no one joining Michael Saunders in his lone vote to curtail the existing programme of bond purchases. That shift in voting members changed expectations within markets that without the appointment of a comparably hawkish member to replace the outgoing chief economist, interest rate expectations (and thus GBP) could be over-priced. Ahead of the next meeting scheduled towards the end of this month, the appointment of his replacement has now been made. The proof will be in the pudding (or in this case the slightly less appetising two-day meeting followed by a vote and minutes publications), but markets so far judging by GBP’s performance yesterday are not too disappointed.
A former ECB official and banker will join the board: Huw Pill. He will assume the permanent position of Chief Economist at the BoE and serve at least one term on the rate-setting Committee. We will have to wait to see exactly what his prognosis is of the UK economy and the post-pandemic global recovery before considering the vacuum filled or even developed further, but the initial signs are constructive to GBP. Pill has been a proponent of conditional and limited QE. There is a thought of monetary policy that unconstrained and seemingly endless QE support becomes a facet of rather than a remedy for an ailing economy and the incoming member falls into this camp. His doctrine of limited QE should therefore, markets expect (and as they priced into the modest rally in GBP during yesterday’s session) that his appointment will see the voices for a normalisation in policy grow in volume and number. This promise of higher yield and reward behind Sterling should support the currency.
Discussion and Analysis by Charles Porter