BOE Doves Take Hawkish StanceJune 23, 2023
The Bank of England surprised market participants yesterday morning when they raised the Official Bank Rate by a full half point to 5.00%. The move caught traders off guard as the BOE had chosen to raise rates by only a quarter percentage point at each of the two meetings prior. It also comes at a time when the Fed has pumped the breaks on its own hiking cycle with a pause, and just days ago, the ECB raised rates by only 25 basis points. That said, the decision to surprise the market with such a hike was not without cause. With this week’s CPI data in the UK so astoundingly hot, this hike was certainly commensurate with the circumstances. While the BOE is still not as restrictive as the Fed, it is a step in the right direction.
As priced yesterday by the overnight index swap market, the BOE rate is seen to be peaking just above 6% by February 1, 2024 as shown in the Bloomberg chart below.
In yesterday’s three-day chart, we saw the peak rate jump twice, once on the inflation news and again on the rate decision. The BOE is now expected to bring rates up to a level almost a full hike’s worth higher than was expected at the beginning of the week.
It appears that the BOE’s Monetary Policy Committee has realized the dire nature of their situation and is becoming more hawkish overall. The vote to increase rates however was not unanimous. In fact, both Swati Dhingra and Silvana Tenreyro voted to maintain rates at 4.5%, not even advocating for a quarter point hike. Why the discrepancy?
I created this analysis of committee member stance on rate hikes by feeding the voting history of committee members over the last seven meetings into our AI engine. In the graphic below, you will notice that Tenreyro and Dhingra represent two of the three most dovish members on the committee. Their votes to maintain rates at the 4.5% level were in line with their stated positions.
Interestingly, the most seemingly dovish member, Ben Broadbent, was among the seven committee members who voted for a full half point hike. To me, this demonstrates that even some of the more dovish members recognize the magnitude of the inflation problem in the UK.