Bank of England sticks, twists to come

The Bank of England held rates, vote 9-0 signals rare agreement between the hawks and doves...statement points strongly to near-term inflation risks, wait-and-see is the order of the day for central banks but market is moving to price in more hikes as the committee sounded like it’s more worried about inflation than growth/jobs. 

There was a hawkish shift on show. Pointedly the BoE didn't suggest further loosening is warranted and members are ready "to act as necessary" to ensure that CPI inflation remained on track to meet the 2% target in the medium term. Members said the next 6 weeks would be key to shed light on the duration and scale of the conflict and likely impact on inflation...that is by the next policy meeting on April 30th ... we could therefore assume that the Bank could be ready to hike at the next meeting if the conflict is still raging and energy markets still elevated..?

Gilt yields rose with the 2yr spiking ~30bps to above 4.5% - up 50bps since yesterday at one point before paring the rise to sit around 4.4%.This gave sterling a little tailwind with the market now pricing in at least 50bps of hikes by the BoE this year...seems way too hawkish a read but the Bank did lean more into the idea of pulling a monetary policy lever should inflationary pressures persist. GBPUSD had been around 1.3280 prior to the announcement moved north of 1.3374 afterwards on a simple carry trade...touching the highs from yesterday before turning back a touch.

The moves in gilts – with markets now pricing in two hikes this year and possible a third – reflects the hawkish shift and the fact the BoE did not reassure markets that it expects this to be a transitory shock to energy prices.

However the market may have moved too abruptly. Governor Andrew Bailey pushed back against this aggressive repricing later on. “I would caution against reaching strong conclusions about us raising interest rates” he said, adding that “the markets are getting ahead of themselves in assuming rate rises”.

In the summary, the BoE stated pointedly that it’s “alert to the increased risk of domestic inflationary pressures through second-round effects in wage and price-setting, the risk of which will be greater the longer higher energy prices persist”.  

CPI inflation is now expected to be close to 3.5% in March, almost half a percentage point higher than expected in Feb, and forecast to be around 3% in Q2 rather than 2.1% in the February Report, with the BoE saying the decline from Q1 to Q2 will now be modest.

We should be clear if the Bank has to hike twice this year it will be because energy prices have materially spiked inflation, the economy will be in freefall already and tightening would just make it much worse.
GBPUSD showing signs of life as the MACD tries to make a bullish crossover after the 76.4% Fib level held.