Sterling rises as BoE vote shifts

22 Jun 2018

Sterling rises as BoE vote shifts

The Monetary Policy Committee maintained the stance of monetary policy at its June meeting, as widely expected.

The Monetary Policy Committee maintained the stance of monetary policy at its June meeting, as widely expected. However the vote to keep the Bank rate at 0.50% was 6-3, with BoE Chief Economist Andy Haldane this time joining Ian McCafferty and Michael Saunders in favouring a 25bp hike. Meanwhile the MPC unanimously voted to keep both the stock of gilt purchases (QE) and corporate bonds unchanged at £435bn and £10bn, respectively. Yesterday’s focus was never going to be on the decision on rates itself. Instead the key point was to determine whether there was still a chance that the committee could raise rates in August. The shift towards a more hawkish 6-3 vote (previously 7-2) clearly means that it can. Moreover the minutes to the meeting, released alongside, were upbeat. Members seem more convinced that the soft patch in the first few months of the year was temporary.

Economic indicators

From a domestic perspective the committee identified that indicators of consumer expenditure have strengthened, stating that ‘downside risks that had been implied by a number of household sector indicators had dissipated’. Moreover members suggested that the weakness of April’s industrial production data could reflect an unwinding of a period of involuntary stockbuilding over Q1 due to the cold weather. Indeed yesterday’s CBI Industrial Trends Survey for June pointed to a rebound in order books and lower inventories, hinting that this process has come to an end. From a cost perspective the minutes confirmed that the strengthening in global energy prices implied a firmer CPI profile over the next six months, a trend which would be reinforced if sterling’s recent weakness were to persist. Members agreed that pay and domestic cost growth had ‘continued to firm broadly as expected’.

Focus on August

The net result is that in terms of a rate hike, August has gone live again. Certainly April’s poor industrial production numbers (and to an extent construction) has not resulted in the MPC shying away from a possible summer tightening. Our sense is that even those members who backed steady policy seriously considered a hike this time. Accordingly we are now less confident about our call that the MPC will hold its fire until November. Indeed a more convincing pick-up in various activity indicators would encourage us to move our view forward to August.

Market reaction

Markets reacted sharply to the minutes. Sterling, which has been under pressure for a while, rose by a cent to $1.3210 and close to 1p against the euro to 87.3p. Interest rate markets sold off. The SONIA curve is now pricing in a 65%-70% chance of an August hike, compared with roughly 50% beforehand.

Greek breakthrough or blend and pretend?

EU leaders are hailing a major breakthrough on the long-running Greek financial crisis as an agreement was reached to ease the southern Europeans nations post-bailout debt burden. The agreement has seen the maturity of almost €100bn of loans pushed out by 10 years, with a moratorium on interest rate and amortization payments. Eurogroup creditors have also agreed a final disbursement of €15bn euro to help pay arrears and refinance maturing debt, while Greece will also receive approximately €4bn euros of profits that the ECB have made on their purchases of Greek bonds to date.

Reaction has been mixed so far. The move was hailed by eurozone finance ministers, politicians and central bankers as a positive step towards regaining access to debt markets, while Greek finance minister Euclid Tsakalatos claimed that it finally makes Greece’s debt burden “viable”. However some analysts have suggested that its more of the same kicking the can down the road that has been the default response to the Greek crisis. Overall, the euro is higher this morning, with EURUSD almost 1% above the levels of yesterday evening.

UK Mansion House speeches

Chancellor Philip Hammond and BoE Governor Mark Carney delivered their annual Mansion House speeches last night. The Chancellor used his appearance to set out his continued efforts to champion the City’s cause in Brexit negotiations. He reiterated that he continues to see ‘equivalence’ of regulatory arrangements as the only viable model for Brexit whilst pushing back strongly against EU efforts to force the UK to accept a more gold-plated version of equivalence – ‘enhanced equivalence’. The BoE Governor’s speech also championed the equivalence model, in a speech covering a range of issues from world demographic shifts to specific issues on such as the unwinding of QE on the BoE’s balance sheet. The Governor’s speech reiterated the message in yesterday’s MPC meeting minutes that the BoE was now planning to unwind its QE holds when Bank rate “reaches around 1.5%”.

Irish Economy: NTMA cancels another €500m of legacy debt

The NTMA announced yesterday that it has cancelled another €500m of the Irish FRB that had been due to mature on 18 June 2047. This debt was linked to the landmark IBRC transaction in 2013, which was a major milestone on the road to Ireland’s return to creditworthiness. To date the NTMA has repurchased €11.5bn of the €25bn of bonds issued as part of the ‘Prom Note’ deal, with €2.0bn of these repurchases taking place this year. All of the bonds were held by the Central Bank of Ireland, whose holdings have previously attracted adverse comment from the ECB relating to monetary financing concerns, although Frankfurt has since acknowledged the progress made in reducing the stock of IBRC-related assets. While the effective servicing cost of the IBRC-related bonds is immaterial (as the Central Bank repatriates most of its profits to the Exchequer), the repurchases serve to improve the optics of Ireland’s headline debt metrics. This latest buyback, like its predecessors, is helpful in terms of marginally improving Ireland’s headline debt/GDP metrics.

Economic Releases

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