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Tuesday, 17 October 2017

The BoE Minutes

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When divergent views morph into consensus

Divyang Shah, Columnist

Divyang Shah, IFR Senior Strategist

The minutes of the September BoE MPC meeting highlight that the adoption of forward guidance, coupled with strong data has managed to squash dissenting voices. They seem to be written in a way so as to convey this sense of unity and in turn strengthen the forward guidance policy which is still in its infancy.

They show a 9-0 vote on QE and the base rate and thus an MPC that is no longer divided. This show of unity seems deliberate with the only passage reflecting any kind of divergence relegated to a line that simply says “members had different views about the extent to which a further loosening of the monetary stance might be warranted” based on their judgement about how economic slack is reduced as the economy grows.

There are no further details as to discussions on what members felt that slack would be used up quickly or more slowly.

The construction of the forward guidance has itself allowed for very little room for divergence to show through. The doves have their unemployment threshold as a marker for keeping the option of further QE alive while the hawks have the knockouts to rely on to justify a change. The show of consensus allows the BoE to strengthen its forward guidance and in turn support the economic recovery.

While the BoE has not walked down the road of repeating its view that market view on rates is “not warranted” there seems to be an implicit endorsement that such moves are OK provided they are accompanied by stronger data. The minutes show that the BoE highlight that the recovery was taking hold and that this was “accompanied by an upward movement in sterling market interest rates”.

The consensus vote from the MPC helps to strengthen its forward guidance message but this still leaves the BoE with the problem that markets do not believe that it won’t be forced into hiking rates early.

Optimism over the growth outlook and concerns over a housing bubble at a time when inflation remains sticky and elevated suggest that the BoE will continue to have a hard time convincing the market. Dec futures are around 40 ticks lower than just prior to the announcement at 107.64.

We had suggesting receiving 1y1y GBP at 1.165% and will look to close out the trade at 1.145% looking to stay neutral over the FOMC meeting.

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