BoE rate Decision
It widely expected (Rates markets are pricing in a 90% probability of a hike) the Bank of England (BoE) Monetary Policy Committee will hike policy rates 25bp after 10 years. We are expecting MPC 7-2 vote split with committee members Cunliffe and Ramsden dissenting for a no action. David Ramsden indicated that he was not with the majority while Jon Cunliffe expressed concern over the timing of rate hikes (Silvana Tenreyro is data dependent and could go either way). The view is already priced into the GBP so the key issue will be the accompanying communications.
We suspect that bank will reduce its current hawkish tone by reinforcing the strategy of “one-and-done.” Our view for a softer tone is based on expectations for wage inflations decelerate which the Inflation report should provide hint towards. In addition the bank has downgraded growth forecast for 2017 to 1.7% from 1.9% as consumer spending (and slower wage growth). We anticipate that Brexit related uncertainty will damage sentiment and inflation outlook pushing the next rate hike at least 6 months away.
No surprise from the Fed ahead of the Chair nomination
That was clearly not a surprise. Fed hold rates unchanged and has hinted for a December rate hike. The key rate stays at 1% to 1.25% of the FOMC. The likelihood of a rate hike for December has now been assessed by markets above 92%. The monetary policy will then remain then loose for some more time and stocks markets have already hit new highs yesterday.
Patience is definitely a key word for the Fed even though the unemployment data as well as the growth are very decent. Last quarter growth was 3% and unemployment rate is at 4.2%. Those good figures should have pushed the Fed to raise rates. Inflation is also on the rise with crude oil prices rising due to the recent hurricanes.
The fact that the Fed has a $4.5 trillion balance sheet will make it tough for the Fed to tighten monetary policy as it could trigger massive sell-off in the bond markets. Fed monetary policy is less and less about economic fundamentals but rather on the massive debt management.
