Markets
The Bank of England raised its policy rate for a fourth consecutive time by 25 bps, from 0.75% to 1%, the highest level since February 2009. Governor Bailey and co ordered internal staff to present a strategy to actively sell bonds from its QE-portfolio by the August meeting. In the past, they vowed to put this process in motion once policy rates hit 1%. Internal division within the Bank of England is extremely high. Three out of nine governors voted in favour of a 50 bps rate hike because the further deteriorating inflation outlook. The BoE in its new Monetary Policy Report puts the inflation peak now at slightly over 10% in Q4 (because of another increase of 40% in the UK energy price cap in October) compared with around 7.25% in the February report. Based on the market implied policy rate path (2.5% policy rate peak by mid-2023), inflation will fall to just above the 2% target by end 2023 and to 1.3% end 2024 as external factors fade. Pay growth is set to accelerate to 5.75% (!) this year before falling afterwards. Two other, dovish, officials dissented against the central bank’s guidance on additional rate moves resulting in an official line that “most members judged that some degree of further tightening in monetary policy might still be appropriate in coming months.” They represent the camp fearful of the growth outlook. The BoE predicts a 1.5% decline in real disposable income for households this year, which is the 2nd largest fall since 1964 despite supportive fiscal measures. Under current forecasts, a technical recession will be narrowly avoided, but GDP is set to shrink by 1% Q/Q in Q4 2022. Annual growth numbers for 2023 and 2024 are a miserable -0.25% and +0.25%. The poor economic outlook prompted money market investors to scale back rate hike expectations especially given the high internal division. The UK yield curve bull steepened with yields losing 17.4 bps (2-yr) to 5.1 bps (30-yr). The Dec2022 3-month GBP SONIA future now trades at 2.09% compared with 2.39% ahead of the meeting. German Bunds see some spillover effects as markets fear a similar dilemma down the road for the ECB. ECB Chief Economist Lane today also refrained from calling the July meeting a live one to finally start a European tightening cycle. The German yield curve shifts in similar fashion with yields losing 5.5 bps (2-yr) to flat (10-yr). US Treasuries underperform. US yields rise by up to 7 bps with the 10-yr yield testing 3%. Yesterday’s “correction” following the FOMC meeting proved to be short-lived. Sterling gets a beating with EUR/GBP taking out the YTD high at 0.8512. The pair currently changes hands around 0.8540. Cable sinks below 1.24 to the weakest level since July 2020. The dollar is again better bid with EUR/USD trading at 1.0560 from an open above 1.06.
News Headlines
As flagged at the March meeting, the Norges Bank left its policy rate unchanged at 0.75%. However, based on the Committee’s current assessment the policy rate will most likely be raised in June as planned. The NB still considers policy as expansionary while the upswing in the Norwegian economy continued and as the unemployment is lower than projected. Regarding the balance of risks, the MPC is concerned with the risk of accelerating price and wage inflation. If there are prospects of persistently high inflation, the policy rate may be raised more quickly than indicated by the policy rate forecast in the March Report. The krone gradually weakened after announcement. EUR/NOK rebounded from the 9.80 area to currently trade near 9.86.
The Czech national bank surprised markets again. After slowing the pace of rate hikes to 50 bps at the end of March meeting, the CNB today again accelerated its anti-inflation campaign by raising the policy rate from 5.0% to 5.75%. Most market analysts only expected a 50 bps hike. Comments of late from CNB governors provided mixed signals, but several members flagged a more modest or even a finetuning approach. The Czech koruna hardly gained any ground despite the bigger than expected rate hike. EUR/CZK trades little changed near 24.60.
