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GBP Soars As BOE Suggests The Market Is Underpricing A UK Rate Hike

Date: Thursday, September 14, 2017 11:34 AM EST

BOE GBP

 

 

Rates Unchanged But Hawkish Signals Support GBP

 

 

GBP soared to fresh 2017 highs against the US Dollar today as the latest Bank of England meeting marked a further hawkish shift. Although the MPC voted 7 – 2 to keep rates on hold, there were clear indications that the bank is getting ready to raise rates.

The minutes of the meeting, released alongside the monetary policy decision, saw the MPC noting a that the economy was showing a “slightly stronger picture” since the last meeting linked to a strengthening of the housing market, firmer employment as well as an increase in retails and new car sales.  The minutes also noted that the MPC feel that “The circumstances since the referendum on EU membership, and the accompanying depreciation of sterling, have been exceptional.”

Market Underpricing BOE Rate Hike

In terms of rates themselves, the minutes noted that the majority of policymakers judged that “some withdrawal of monetary stimulus was likely to be appropriate over the coming months” and that “policy may need to be tightened more than assumed by the yield curve”. Essentially, the BOE was letting the market know that they are underpricing the likelihood of a BOE rate rise at this point.

Rising inflation over the year has seen an uptick in rate hike expectations, but until this meeting, most market players anticipated the first-rate rise happening in H1 next year. Today’s meeting and comments have seen a sharp repricing in rate hike expectations with many now judging a 2017 rate hike as likely, leading to the jump in GBP across the board.

Rate Rise Remains Data Dependant

It is important to note, however, that the bank did highlight its data dependant stance saying that removal off stimulus would be necessary “If the economy follows a path broadly consistent with the August inflation report central projection”. While inflation data has indeed been rising and the unemployment rate has continued to move lower, wage growth remains a sticky issue. The latest wage growth data shows that earnings fell back to 2.1% in the three months to July putting further pressure on the UK consumer.

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