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5 Feb 2016
BoE still a receiver of market rates – Nomura
Philip Rush, Research Analyst at Nomura, notes that the BoE unsurprisingly decided to leave policy unchanged at its February meeting, but there was dovish news in this as Ian McCafferty dropped his hawkish dissent, making the decision unanimous.
Key Quotes
“Further oil price declines over the turn of the year depressed the inflation outlook, including at the 2yr horizon. With the MPC looking for a rise in spot price and wage inflation for confirmation that spare capacity is translating into pressures that warrant a rate hike and that rise not expected to be seen, the MPC is settled in its holding pattern. Consistent with this, our more hawkish forecast for inflation later in 2016 could yet motivate an earlier rate hike once the Brexit referendum is passed, assuming the UK votes to remain in the EU.
Declining market rates delivered some stimulus to the forecast but the constant rate one is anyway low now. Conditional on no change in policy, the MPC sees only a 51% probability of overshooting its target in 2yrs, which implies a firmly neutral outlook for rates, at least in the near term. There is still a small overshoot of the inflation target at the 3yr forecast horizon, which implies some rate hikes will eventually be needed. And Mark Carney confirmed this was the unanimous view of the MPC.
To us, this MPC appears to be a receiver of rates, with whatever the market has priced being shown broadly consistent with the target. So long as that remains true, the market can price whatever it wants without pushback. In that case, the additional 20bp decline in rates since the BoE fixed its conditioning assumptions is also fine, even though we see it as fundamentally inconsistent with the underlying economic outlook.
Our more hawkish outlook than the latest BoE guidance thus also relies upon the market re-pricing on upside inflation news as we doubt this MPC will force the matter. This contributes to the increasing skew of risks towards a later rate hike than our baseline modal forecast of November 2016. With spot inflation pressures subdued and the BoE not attempting to force changing expectations, monetary policy is essentially on the back burner. The Brexit referendum and its recessionary risk become much more interesting in this environment.”
Key Quotes
“Further oil price declines over the turn of the year depressed the inflation outlook, including at the 2yr horizon. With the MPC looking for a rise in spot price and wage inflation for confirmation that spare capacity is translating into pressures that warrant a rate hike and that rise not expected to be seen, the MPC is settled in its holding pattern. Consistent with this, our more hawkish forecast for inflation later in 2016 could yet motivate an earlier rate hike once the Brexit referendum is passed, assuming the UK votes to remain in the EU.
Declining market rates delivered some stimulus to the forecast but the constant rate one is anyway low now. Conditional on no change in policy, the MPC sees only a 51% probability of overshooting its target in 2yrs, which implies a firmly neutral outlook for rates, at least in the near term. There is still a small overshoot of the inflation target at the 3yr forecast horizon, which implies some rate hikes will eventually be needed. And Mark Carney confirmed this was the unanimous view of the MPC.
To us, this MPC appears to be a receiver of rates, with whatever the market has priced being shown broadly consistent with the target. So long as that remains true, the market can price whatever it wants without pushback. In that case, the additional 20bp decline in rates since the BoE fixed its conditioning assumptions is also fine, even though we see it as fundamentally inconsistent with the underlying economic outlook.
Our more hawkish outlook than the latest BoE guidance thus also relies upon the market re-pricing on upside inflation news as we doubt this MPC will force the matter. This contributes to the increasing skew of risks towards a later rate hike than our baseline modal forecast of November 2016. With spot inflation pressures subdued and the BoE not attempting to force changing expectations, monetary policy is essentially on the back burner. The Brexit referendum and its recessionary risk become much more interesting in this environment.”