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10 Dec 2015
BoE: Comfortable with the market’s dovish stance - TDS
FXStreet (Delhi) – Research Team at TDS, notes that as expected, the MPC left Bank Rate and QE unchanged, with another 8-1 vote and the Minutes showed an outlook broadly consistent with that in the November Inflation Report, and didn’t push back on the market’s dovish shift in recent weeks.
Key Quotes
“As universally expected, the MPC voted to maintain the UK Bank Rate at 0.5% and the level of QE at £375bn. Ian McCafferty maintained his vote favouring a rate hike. The minutes of the meeting highlighted that the outlook from the November Inflation Report was largely intact as little data had been released since then, with international developments largely in line, and domestic demand helping support UK GDP as the export sector struggles.”
“The Bank initially fought back, but hasn’t been fully successful: while expectations firmed slightly for a November 2016 hike in Bank Rate, expectations further out the curve have fallen, with about 20bps priced out of 2020 rates between mid-November and this week. Today’s Minutes presented an opportunity for the MPC to further correct markets, but they obviously didn’t see the need, which suggests that they are comfortable with the market’s current stance.”
“Ultimately, we think the BoE will be in a position to start lifting Bank Rate, at a very gradual pace, in May 2016. The domestic economy is in relatively good shape, with damage to the manufacturing and export sectors from a strong currency being made up by strength in domestic spending, particularly in the services sectors. Labour market tightness has edged back recently, but real wages remain healthy enough to support continued household spending. Renewed declines in oil prices should help maintain real wage growth even further into 2016, supporting real activity growth further. The export sector, however, continues to suffer from a relatively strong currency but weakness there is being offset domestically.”
“On the inflation front, while the latest dip in oil prices could weigh further on headline inflation through 2016, the MPC is likely to see through this, with a firmer focus on core inflation and price pressures for 2017. As long as domestic conditions continue to remain healthy, with real incomes growing, inflation should gradually start moving closer to the BoE’s 2% target. And as this comes into greater focus towards mid-2016, we expect the MPC to begin a very gradual stream of increases in Bank Rate.”
FX Implications
“Today’s minutes leave sterling in an relatively unexciting position. The slightly dovish but still broadly balanced tone is in keeping with recent communications and we have not seen anything buried in the details that are likely to catch investors off guard. This leaves sterling largely driven by external factors as markets settle into their year-end trading dynamic. While we remain longer-term GBP bulls, we think this remains more a story for next year once an eventual BoE rate hike comes into clearer focus.”
“For now, we think the natural centre of gravity for EURGBP is higher as investors continue to digest last week’s ECB disappointment. From a tactical perspective, we prefer to buy this cross on dips for a possible move up toward 0.7320/50 zone in coming days. If realized, we would be inclined to reassess and consider fading the recent rally in EURGBP to realign ourselves with the larger trend lower.”
Key Quotes
“As universally expected, the MPC voted to maintain the UK Bank Rate at 0.5% and the level of QE at £375bn. Ian McCafferty maintained his vote favouring a rate hike. The minutes of the meeting highlighted that the outlook from the November Inflation Report was largely intact as little data had been released since then, with international developments largely in line, and domestic demand helping support UK GDP as the export sector struggles.”
“The Bank initially fought back, but hasn’t been fully successful: while expectations firmed slightly for a November 2016 hike in Bank Rate, expectations further out the curve have fallen, with about 20bps priced out of 2020 rates between mid-November and this week. Today’s Minutes presented an opportunity for the MPC to further correct markets, but they obviously didn’t see the need, which suggests that they are comfortable with the market’s current stance.”
“Ultimately, we think the BoE will be in a position to start lifting Bank Rate, at a very gradual pace, in May 2016. The domestic economy is in relatively good shape, with damage to the manufacturing and export sectors from a strong currency being made up by strength in domestic spending, particularly in the services sectors. Labour market tightness has edged back recently, but real wages remain healthy enough to support continued household spending. Renewed declines in oil prices should help maintain real wage growth even further into 2016, supporting real activity growth further. The export sector, however, continues to suffer from a relatively strong currency but weakness there is being offset domestically.”
“On the inflation front, while the latest dip in oil prices could weigh further on headline inflation through 2016, the MPC is likely to see through this, with a firmer focus on core inflation and price pressures for 2017. As long as domestic conditions continue to remain healthy, with real incomes growing, inflation should gradually start moving closer to the BoE’s 2% target. And as this comes into greater focus towards mid-2016, we expect the MPC to begin a very gradual stream of increases in Bank Rate.”
FX Implications
“Today’s minutes leave sterling in an relatively unexciting position. The slightly dovish but still broadly balanced tone is in keeping with recent communications and we have not seen anything buried in the details that are likely to catch investors off guard. This leaves sterling largely driven by external factors as markets settle into their year-end trading dynamic. While we remain longer-term GBP bulls, we think this remains more a story for next year once an eventual BoE rate hike comes into clearer focus.”
“For now, we think the natural centre of gravity for EURGBP is higher as investors continue to digest last week’s ECB disappointment. From a tactical perspective, we prefer to buy this cross on dips for a possible move up toward 0.7320/50 zone in coming days. If realized, we would be inclined to reassess and consider fading the recent rally in EURGBP to realign ourselves with the larger trend lower.”