Markets
The Bank of England left its policy rate unchanged at 5% in a 8-1 majority vote. Swati Dhingra dissented in favour of a 25 bps rate cut, on the back of last month’s inaugural move. The central bank also announced an intention to reduce the stock of UK government bond purchases held for monetary policy purposes, and financed by the issuance of central bank reserves, by £100bn over the next 12 months, to a total of £558bn. That’s the same pace as the past 12 months and implies limited active sales (£13bn) given the growing amount of naturally maturing UK Gilts (£87bn). There had been some speculation of an accelerated winddown to address liquidity issues at the front end of the curve where a lot of Gilts are stuck at the BoE balance sheet and where debt issuance is scarce. There has generally been limited news in UK economic indicators relative to the Committee’s expectations in the August Monetary Policy Report. Headline GDP growth is expected to return to its underlying pace of around 0.3% per quarter in the second half of the year. CPI inflation was 2.2% Y/Y in August, and is expected to increase to around 2.5% towards the end of this year as declines in energy prices last year fall out of the annual comparison. Services consumer price inflation remained elevated at 5.6% in August. Private sector regular average weekly earnings growth declined to 4.9% in the three months to July. The MPC suggests that in the absence of material developments, a gradual approach to removing policy restraint remains appropriate. We take this hint as a quarterly rate cut approach similar to the one of the ECB. In case of the BoE, we expect another 25 bps rate cut at the next November policy meeting which includes a new Monetary Policy Report. UK gilt yields add 3.7 bps (2-yr) to 5.8 bps (10-yr) as some expected a follow-up rate cut today. Sterling outperformed with EUR/GBP testing the 0.84 big figure/support zone. Cable (GBP/USD) set a minor new cycle high at 1.3314.
Global markets digested yesterday’s bumper 50 bps FOMC rate cut. US Treasuries rallied with the front end of the curve outperforming up until the release of early US eco data. They showed a slightly better improvement in Philly Fed business outlook, but especially a drop in weekly jobless claims (219k). Together with bullish risk sentiment on stock markets, this currently helps US yields up to 6 bps higher at the very long end of the curve. The dollar initially traded on the backfoot, but EUR/USD’s rally ran into trouble together with US Treasuries (1.1180 intraday top).
News & Views
The Norwegian central bank kept the policy rate unchanged at 4.5% and signaled this will remain the case through end 2024. Inflation has eased by more than expected but underlying gauges have not fallen by the same extent. Particularly worrying the Norges Bank is the larger than expected depreciation of the Norwegian krone. It is seen as a risk to the ongoing disinflation process. While the NB refrained from cutting rates, its governor Wolden Bache did note the time to do so is coming closer. The new policy rate forecasts entails a marginally steeper path down through 2025 (3.75% by end next year). Growth and inflation forecasts were little changed with a still above-target 2.4% inflation in 2027. The NOK is one of the top performers today. EUR/NOK is down from 11.77 to 11.66 with money markets paring bets for a December inaugural cut from 100% yesterday to just 60% today. The ECB’s 25 bps cut last week and especially the Fed’s 50 bps move yesterday probably created some dovish expectations going into the NB meeting today as well. The start of the easing cycle is now seen to take off in early 2025.
The Turkish central bank kept the policy rate steady at 50%. The expected decision was accompanied by a less anticipated drop in language that specifically endorsed further tightening “in case of a significant and persistent deterioration in inflation.” The central bank said that Q3 indicators suggest an ongoing slowdown in domestic demand, resulting in a diminishing inflationary impact. Goods inflation is low and an improvement in services inflation is expected to start next quarter. Both headline and core inflation were above 51% in August. While a significant 10 ppt improvement from the month before, it is still a long way from the central bank’s 38% end-of-year projection and still tenfold the official 5% target. Today’s dovish twist to the statement is seen as the beginning of a U-turn in CBRT policy, probably partially inspired by yesterday’s Fed decision. USD/TRY (34.02) is slightly down for the day but that is by far dollar driven. EUR/TRY by contrast ekes out a gain to just south of 38. The Turkish lira trades near record lows in both cases.
Graphs
EUR/NOK: NOK rallies as central bank pushes back against rate cut expectations for this year
US 10-yr yield extends comeback following FOMC meeting in bullish risk climate
AUD/USD: Aussie labour market supports RBA’s higher-for-longer stance
EUR/GBP tests 0.84 support zone on BoE status quo but break lower becomes a touch nut to crack
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