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The Bank of England decision promised to be a cliff hanger, and it was, even for the nine people deciding what to do.
Breaking a string of 14 consecutive rate rises, the Bank of England opted to hold rates at 5.25%.
It was a narrow 5-4 vote in favor of the pause, with Gov. Andrew Bailey on the side of the majority.
The…
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The Bank of England on Thursday matched the U.S. Federal Reserve by hiking interest rates by a quarter percentage point.
The 7-2 decision, the eleventh consecutive increase, brings the U.K. base rate to 4.25%, and comes after data showed inflation surprisingly accelerated in February to a year-over-year rate of 10.4%.
“Headline CPI inflation had surprised significantly on the upside and the near-term path of GDP was likely to be somewhat stronger than expected previously,” the Bank of England said in the simultaneously published minutes of the meeting. “The members put some weight on the possibility that the stronger domestic and global outlook for demand was also being driven by factors over and above the weaker path of energy prices, given that the strengthening had at least in part preceded the falls in prices.”
“If there were to be evidence of more persistent pressures, then further tightening in monetary policy would be required,” the central bank said.
The central bank did discuss the banking sector, and the failure of the U.S.’s Silicon Valley Bank and the run-up to UBS’s
UBS,
purchase of Credit Suisse
CS,
SVB’s U.K. subsidiary was bought by HSBC for £1.
The central bank’s financial policy committee said the U.K. banking system maintains robust capital and strong liquidity positions and can “continue supporting the economy” even as interest rates rise.
The pound
GBPUSD,
traded over $1.23 after the decision. The yield on the 2-year gilt
TMBMKGB-02Y,
however slipped 7 basis points to 3.42%, after a big rise on Wednesday when the inflation data came out.
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The Bank of England on Thursday slowed the pace of interest-rate hikes down to a half point, as the U.K. central bank balances a need to fight inflation with signs the economy is decelerating.
The Bank of England increased its main interest rate to 3.5% from 3%. There were two votes for no change and one for a 75 basis point hike.
U.K. inflation…
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The Bank of England made its largest interest-rate increase in three decades in response to inflation that the central bank still expects to accelerate.
By a 7-to-2 vote, the U.K. central bank voted to lift rates by a three-quarters percentage point to 3%, as inflation hit a 40-year high in September. The central bank said inflation will further accelerate to 11% in the fourth quarter.
There was one vote, from Swati Dhingra, for a half-point increase, and another, from Silvana Tenreyro, for a quarter-point rise. Both are external members of the central bank’s monetary policy committee.
It was the first gyrations since the turmoil in financial markets that prompted the BOE to step in with a temporary bond purchase program.
“These had partly reflected global developments, although U.K.-specific factors had played a very significant role during this period,” the central bank dryly said of the market reaction to the tax-cut proposals produced by Prime Minister Liz Truss and Chancellor of the Exchequer Kwasi Kwarteng, both of whom have resigned.
The U.K. central bank has now started a delayed bond selling program, and Chancellor Jeremy Hunt has backtracked on the tax-cut proposals as he readies a new “autumn statement” due in mid-November.
The pound dropped despite the central bank matching the Fed’s three-quarter point rate hike. That’s because of a comment found within the minutes of the meeting, that a majority felt rates would not have to go as high as the implied 5.25% path in financial markets.
The pound
GBPUSD,
was weaker on the day at $1.1235 from $1.1392 — though much of that move came before the actual BOE decision — while the 2-year gilt
TMBMKGB-02Y,
rose 10 basis points to 3.08%.
“This will most likely mark the peak in pace of tightening, especially with the Bank highlighting financial markets are pricing too much too soon. Next up for the U.K. will see the focus shift to the autumn statement to see what the chancellor’s fiscal plans are, but in the meantime the headlines point to gilts being relatively more supported, however the currency less so,” said Edward Hutchings, head of rates at Aviva Investors.
Tim Graf, head of EMEA macro strategy at State Street, said the peak rate is likely to be closer to 4% to 4.25%.
“The accompanying messaging was clearly dovish, with the MPC noting the economy was already in the midst of a recession it expects to last into 2023, that inflation will likely fall sharply over the next two years and citing pricing for terminal rates as likely too high, limiting the need to hike aggressively,” he said.
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The Bank of England said Tuesday that it will expand its daily U.K. bond purchase operations to include index-linked gilts, the second move this week aimed at trying to calm market volatility.
“These additional operations will act as a further backstop to restore orderly market conditions by temporarily absorbing selling of index-linked gilts in excess of market intermediation capacity,” the BoE said in a statement on Tuesday, adding that it has also consulted with the Debt Management Office.
The inclusion of those index-linked bonds will run from Oct. 11 to 14, alongside its existing daily conventional gilt purchase auctions, the BoE said.
But it remained to be seen if a second-day move by the central bank to calm markets will be effective.
Investors are anxiously looking ahead to Friday, when the central bank’s emergency bond-buying program announced last month are scheduled to end. The BoE announced additional measures on Monday to smooth that path, but the yield on the 30-year gilt
TMBMKGB-30Y,
jumped 29 basis points to 4.68% on Monday.
While that’s still below the 5.17% peak, it indicates concerns about the imminent end to the central bank’s program were causing fear in the market. The yield on the 10-year gilt
TMBMKGB-10Y,
which the central bank has not been buying, rose 24 basis points to 4.47%
On Monday, the BoE said it would boost the size of its daily gilt purchases and implement extra measures “to support an orderly end” to its emergency bond-buying plans.
It now will buy up to £10 billion ($11 billion) in bonds, up from a previous auction limit of £5 billion ($5.5 billion), though sticking with its pricing policy that has seen the central bank refuse many of the bonds put up for auction.
The BoE also said Monday that it plans to to launch a temporary expanded collateral repo operation for liability-driven investment funds through liquidity insurance operations, which will run beyond the end of this week.
LDI funds are a popular product sold by asset managers like BlackRock
BLK,
Legal & General
LGEN,
and Schroders
SDR,
to pension funds, using derivatives to help them match assets and liabilities so there is no risk of shortfall in money to pay pensioners.
But those measures failed to stop bond yields from surging, amid market fears that the pension fund market is not yet ready for that temporary debt purchase program to end.
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