Markets
The Bank of England lifted its policy rate for the first time since the start of this year’s energy supply shock, from 3.75% to 4%. The MPC was split (8-1) with Catherine Mann voting against the decision. Not in favour of keeping the policy rate steady, but in favor of a larger 50 bps rate hike. The hawkish MPC member already voted in favour of a 25 bps rate hike at earlier meetings. From a risk management and credibility perspective she labels a 50 bps rate hike as “good policy”. She refers to research that everything’s in place for second round effects to materialize and that inflation has been above the 2% target for more than five years now (averaging 4.7%!!). UK CPI inflation increased to 3.5% Y/Y in September and is now expected to rise to around 5% by the middle of next year in a significant upgrade (around 1.25 ppt) compared to the central bank’s July Monetary Policy Report. Absent a resolution in the Middle East, there appears to be a strong case for a second BoE rate hike. BoE Bailey stressed that every meeting is a live one. UK money markets attach a 50% probability to back-to-back action. There remains little evidence of knock-on effects from higher energy prices and their direct impact but the degree of inflationary pressure in the pipeline keeps building as the Middle East conflict enters its ninth month and warrants tightening of monetary policy. Energy hedging or longer-term fixed price contracts have helped many firms for now, but their buffers could prove temporary. In the meantime, the UK economy showed more resilience than expected and the labour market is showing tentative signs of stabilization with slack no longer opening up. During the press conference, BoE Bailey spent a lot of time using the past 48 hours’ correction in energy prices to prove the volatility of the situation which could significantly alter the outlook. He didn’t take the press bait that he’s in the “two-and-done” camp although that seems to be the preferred scenario (even) if the US and Iran manage to land a resolution. In a stickier energy/inflation scenario, without a peace deal, the BoE seems prepared to start 2027 on a hawkish/tightening stance as well. UK money markets see room for a cumulative 75 bps of tightening from current levels. The UK yield curve bear flattens slightly today following the BoE meeting with the front end of the curve adding up to 3 bps. Sterling is unchanged with EUR/GBP continuing to hover near YtD lows around 0.8335. The backing by the BoE serves as a strong GBP-floor going forward. A tighter economic collaboration between the EU and the UK (November 20 Summit), improved risk sentiment following US midterms and EUR-vulnerability to rising EMU credit risk premia also argue in favour of EUR/GBP declining further towards the 2024 low at 0.8222.
News & Views
The Norges Bank held the policy rate as widely expected unchanged at 4.5% today, following a 25 bps rate hike in September. The Committee judges that a restrictive monetary policy is needed to bring inflation down to target within a reasonable time horizon. Inflation remains markedly above target (3.4% headline, 3% core), and the rapid rise in business costs in recent years will likely contribute to keeping inflation elevated ahead. Governor Ida Wolden Bache said it will likely be necessary to keep the rate elevated for a time, adding that the central bank is prepared to hike if that’s needed. For now, though, the latter isn’t necessary based on the Norges Bank’s current assessment of the outlook. The central bank is walking the fine line between being sufficiently restrictive but not too much so that it weighs the economy down more than needed. Money markets barely changed their view on future tightening with the possibility of one more hike by 2027Q1 remaining below 50%. The Norwegian krone was unfazed around EUR/NOK 10.44. In a broader perspective, NOK ended a strong rally at the beginning of October. The timing matched oil prices hitting a post-war peak just below $120/b before correcting sharply lower.
Swedish inflation for October came in at the low end of expectations. Headline CPIF eased more than analysts and the central bank foresaw from 1.5% to 1.1%. Core CPIF was a mere 0.1% y/y, down from 0.5%. Both measures are biased by government measures with real inflationary pressures more in the 2%+ and 1%+ region respectively. The central bank yesterday raised rates to 2% in anticipation of inflation rising further in the months ahead and said it expects to do so again in the coming year. Today’s data inject some doubt in the money market and pressure the Swedish currency. EUR/SEK bounces from the 10.9 support area to 10.98. Doing so marks a tentative end of a dire month October for the pair, led by euro weakness.
 with Catherine Mann voting against the decision. Not in favour of keeping the policy rate steady, but in favor of a larger 50 bps rate hike. The hawkish MPC member already voted in favour of a 25 bps rate hike at earlier meetings. From a risk management and credibility perspective she labels a 50 bps rate hike as “good policy”.){kind=link}