BOE mildly prods market to expect a 2018 hike pound not impressed

The Bank of England has cut its forecasts for growth and wages, however, it has balanced this with a mild prodding of the market to price in the prospect of a rate hike in Q3 2018, after saying that monetary policy may need to be tightened by a “somewhat greater extent” then the market is currently expecting. This is fairly non-committal language and didn’t convince the FX market that the BOE is serious about hiking, especially since the hawkish contingent lost one of its members at this meeting – Kirsten Forbes left in June and her replacement, Silvana Tenreyo, didn’t follow her footsteps instead choosing to vote with the pack. In fairness, the BOE can hardly hike rates any time soon when it has just cut this year’s growth forecast to 1.7% from 1.9%, and 2018 GDP has been lowered also. Inflation was broadly unchanged, but wage inflation was revised sharply lower, the BOE now expects real wages to fall by 0.5% this year, suggesting that the BOE (along with other global central banks) still haven’t figured out how to fix the problem  of low unemployment but stagnant wages.

As expected, the Bank will bring its Term Funding programme to an end when it expires in February next year, but not before raising the ceiling on it to £115bn from £100bn, which it said is due to strong demand from banks.

Although the pound is reacting to the diminished hawkish contingent at the BOE coupled with the decline in the growth forecasts, the pound may also weaken on the back of flip-flopping Carney. At the end of June he sounded concerned about inflation and said the bank would tolerate above target inflation over the long term. However, he has dialled back that rhetoric today, at least in the Inflation Report, which may lead markets to think twice before trusting his forward guidance in future. We will be listening out to his press conference at 1230 BST to see if his message shifts back to a more hawkish tone, if not then we could see a sharper decline for the pound, GBPUSD has already  tumbled more than 80 points, while EUR/GBP has tested the air above 0.90. The weaker pound is good news for the FTSE 100, which is at its highest level since the end of June.

Also worth listening out for today: how does the bank balance its concerns about rampant credit growth combined with keeping rates low for the next year?