Market News & Insights
16 June 2017

BoE’s Three Musketeers

It was the UK’s turn to take centre stage yesterday with the release of the Bank of England Interest rate decision and it certainly took the markets by surprise. Most agreed that it was a certainty that rates wouldn’t rise however three of its policymakers voted for a rate hike, the closest it has come to raising rates since 2007, despite signs of a slowdown in Britain’s economy.

BoE policymakers, Ian McCafferty and Michael Saunders joined previous rate hike advocate Kristin Forbes in voting to reverse the BoE’s decision last August to cut rates to a record-low 0.25 percent. This has changed the forecast for a rate hike next June from 20% chance to almost 50% but the likelihood is we may see one even sooner. With the economy slowing in early 2017, higher inflation and slowing wage growth the UK was the worst performer among the world’s top seven advanced economies.

The BoE has blamed a rise in inflation (past its 2% target) on a weak pound, many read the split as a warning that officials would defend the currency with action regardless of the economic downturn. Most would also look at the political landscape and the shambles that May, who seems to be going from disaster to fresh disaster has created, with Brexit talks start in earnest, that the MPC are willing to react. Sterling, trading below $1.27 before the decision pushed to a high of $1.2795, with the currency pushing to €1.1463 against the euro.

Today in the Eurozone we have the consumer price index release at 9am. The index is expected to have risen from 1.4% a year ago in May. Aprils reading increased much higher to 1.9% which some commentators erroneously interpreted to imply that the European Central Bank is close to its inflation target of 2%. Overall though the areas inflation has remained modest and has forced the ECB to keep monetary policy stable

In Tokyo, The Bank of Japan left policy unchanged this morning, maintaining its aggressive monetary stimulus aimed at lifting inflation, which continues to show weakness despite brighter spots elsewhere in the economy. The decision, reaffirming the central bank’s ultra-easy stance comes less than two days after the Federal Reserve raised interest rates for the third time in six months despite renewed weakness in U.S. inflation. The Fed also gave more details on how it plans to trim its balance sheet, a topic that Japan’s central bank is gradually starting to talk about after months of insisting that it was still too early to discuss.

After the big central bank meetings, of which the Bank of Japan’s meeting overnight was the last one, the calendar is relatively empty of important events. Next week’s most important releases will be the June flash purchasing manager indices on Friday.