Pound Slides After BOE Says Won’t Tighten Until “Clear Evidence Of Significant Progress On Inflation”
The barrage of central bank announcement continued, with the BOE the latest bank to keep policy on hold, voting unanimously to keep the rate at 0.1% and QE at 875BN pounds
— Bank of England (@bankofengland) March 18, 2021
While that was not a surprise, what the market was focusing on was whether the BOE would continue its recent hawkish pivot that together with the recent good news on the UK’s vaccine front had helped send cable sharply higher in recent months.
So following in the Fed’s footsteps, and unwilling to risk its own taper, the BOE addressed that question head on, when the bank brushed aside a recent increase in bond yields, saying that overall financial conditions are “broadly unchanged” and writing in its statement that “the MPC will continue to monitor the situation closely. If the outlook for inflation weakens, the Committee stands ready to take whatever additional action is necessary to achieve its remit. The Committee does not intend to tighten monetary policy at least until there is clear evidence that significant progress is being made in eliminating spare capacity and achieving the 2% inflation target sustainably.”
Some more highlights from the BOE decision, courtesy of Newsquawk:
- Committee continued to envisage that the pace of purchases could remain at around its current level initially, with flexibility to slow the pace of purchases later
- Should market functioning worsen materially, the BoE stood ready to increase the pace of purchases to ensure the effective transmission of monetary policy
- Current stance remains appropriate; news of recent plans for lifting restrictions may be consistent with a slightly stronger outlook for consumption growth
- Plans for the easing of restrictions on activity have been announced and envisage that restrictions could be lifted somewhat more rapidly than was assumed in the February Report
- If the outlook for inflation weakens, the Committee stands ready to take whatever additional action is necessary to achieve its remit
- There is judged to be a material degree of spare capacity at present
- The outlook for the economy, and particularly the relative movement in demand and supply during the recovery from the pandemic, remains unusually uncertain
- The rates of Covid infections and hospitalisations have fallen markedly across the United Kingdom and the vaccination programme is proceeding at a rapid pace
- Outlook continues to depend on the evolution of the pandemic, measures taken to protect public health, and how households, businesses and financial markets respond to these developments
- Upward movement in yields appeared to have been driven by positive news on global economic growth
- Different MPC members placed different weights on the balance of risks around the outlook
- The substantial new US fiscal stimulus package should provide significant additional support to the outlook
In kneejerk reaction, Credit Agricole FX strategist Valentin Marinov, said that “while the BOE is not necessarily more dovish today, it is by no means turning more hawkish despite the better data of late.” That could hurt the pound, especially against a stronger dollar, he said, and he was right, with cable – which had hit 1.40 earlier – dipping as low as 1.3945 although still well above the pre-FOMC level of 1.3850.
Vanda Research FX strategist Viraj Patel echoed the sentiment, tweeting that the “Bank of England much more two-way risks than what $GBP markets have been pricing in recent months on UK vaccine outperformance.”
Bank of England much more two-way risks than what $GBP markets have been pricing in recent months on UK vaccine outperformance. Suspect the reference to wanting significant inflation progress is a de facto AIT (running economy hot) policy stance. Time to turn more neutral on $GBP pic.twitter.com/wgz7cwkSlk
— Viraj Patel (@VPatelFX) March 18, 2021
But what we find most remarkable is how quickly the landscape has changed: just last month, the focus of the market was whether the BOE would address negative rates. Fast forward to today and there was not a single mention of NIRP by the BOE.
Thu, 03/18/2021 – 08:15