Policy was held unchanged from the meeting at the Monetary Policy Committee (MPC).
Against usual practise, the MPC published a statement alongside the decision (see here) revealing two policy relevant surprises:
- The MPC’s comment on recent volatility in rates: “The significant upward movement in market interest rates would, however, weigh on that outlook; in the Committee’s view, the implied rise in the expected future path of Bank Rate was not warranted by the recent developments in the domestic economy”.
- The MPC is warming up to forward guidance being published after the August meeting: “The latest remit letter to the MPC from the Chancellor had requested that the Committee provide an assessment, alongside its August Inflation Report, of the case for adopting some form of forward guidance, including the possible use of intermediate thresholds. This analysis would have an important bearing on the Committee’s policy discussions in August.
What form forward guidance might take, if implemented at the BoE, is the big question. It could be a Fed type rule with thresholds on unemployment or similar, it could be the 'old' Fed type rule with a specific date before which no rate hike should be expected, it could be a Japanese type rule with targets on money balance, or something new like a NGDP type rule etc. This uncertainty should be reflected in a market risk premium going forward
The initial market reaction was a rally in the fixed income markets where the yield belly of the swap curve (3-6Y) declined some 11-12bp and the money market curve (1m SONIA) flattened. Sterling also weakened significantly in the FX market. In that sense, the arrival of Carney has already had an effect and we are surprised that already he has been able to get acceptance for a change from the previous pattern four days into the job.
To Read the Entire Report Please Click on the pdf File Below.