Economists at BBH explain that for its part, the Bank of England has whipsawed the markets and last week’s 5-3 vote was closer than expected.
“We had correctly anticipated Carney would set the market straight. Indeed Carney played down the need to raise rates soon. However, Haldane, the BOE chief economist, came out today, seemingly allying himself with the Hawks over Carney.”
“One could reconcile Carney and Haldane. Carney did suggest that the economic data in the coming months would be particularly important. Haldane said that if data “are still on track” that unwinding the accommodation provided last August (after a referendum) “would be prudent moving into the second half of the year.” Haldane’s comments are all the more important because he is seen as part of the dovish contingent at the BOE, unlike say McCafferty who had dissented last year in favor of an immediate hike on a few occasions.”
“However, Carney seems considerably more concerned about the economy going forward. He noted the squeeze on earnings that could weaken consumption and output. He also put an emphasis on the uncertainty (Brexit, politics) that increase the range of possible outcomes. Despite the slowing of the UK economy, the slowing earnings growth and the loss of momentum of the PMIs, Haldane insists that the overall economic picture is a “reasonably reassuring one.”
“Looking at the OIS, a week ago, before the BOE meeting, there was about a 6.5% chance of a hike before the end of the year. At the end of last week, there was almost a 24% chance discounted. It now stands near 36%. Sterling has encountered offers about a cent lower than it did last week on the MPC vote. Haldane’s comments did not completely unwind Carney’s effect. Yesterday’s high was almost $1.2760. Today’s high has been $1.2710. Sterling has already unwound about half of its Haldane-inspired gains. A break of $1.2630 warns of a retest of the lows.”