GBPUSD spiked nearly 100 pips after the BoE opted to hold rates at 0.75%, as markets adjusted having been pricing a 25% risk of a cut.
Adding to the initial upside was the vote split; only 2 MPC members voted for a cut, less than the three the market had expected, implying the BoE is collectively less dovish than markets had thought.
Ultimately, it looks like the dual arguments that 1) the economy is on the mend after its pre-election woes (as evident in January PMI, housing and Deloitte CFO survey data) and 2) there will be a fiscal boost from the government in February, won out.
However, tweaks to the statement indicated that the BoE will be open to the prospect of rate cuts moving forward, should the economy not recover in line with the bank’s expectations; “Policy may need to reinforce the expected recovery in UK GDP growth should the more positive signals from recent indicators of global and domestic activity not be sustained or should indicators of domestic prices remain relatively weak” the bank said.
Moreover, the reference to the need for gradual, limited rate hikes going forward was removed. It was replaced by a reference to “some modest” tightening of monetary policy if the economy recovers as forecast. In other words, rates could go either way, and it will depend on whether or not the economy shapes up in line with BoE forecasts. Coronavirus risks were noted, but the bank said it was too early to gauge its effects.
GBP saw further (albiet minor) upside during Governor Carney’s press conference as pricing for BoE easing later in the year receded; Carney was generally very balanced and did not allude to rate moves in either direction, indicating that the bank sees itself as neutral moving forward.
However, most analysts (including us) still believe the next move in rates is likely to be lower. Coronavirus will shock global GDP, denting the global recovery we had seen going into 2020. Domestically, despite the UK officially exiting the EU tomorrow, there is still huge trade uncertainty regarding the future UK/EU relationship that is likely to hold back business investment in 2020.
Therefore, markets still price some risk of easing later in the year, a reflection of the risk that the UK economy may undershoot the BoE’s forecasts.