BoE rate rise – the MPC minority loses but wins

The UK central bank raised interest rates by 25bps today. Big deal. Because GBP fell and stock markets rose, we have just witnessed a dovish rate rise. In achieving this feat, the BoE has had the same success as Draghi on the expected tapering of the ECB’s QE announced late last month. Hats off to both the ECB and the BoE

How is a dovish rate rise or QE taper achieved? By convincing markets that their expectations of further rate rises or faster tapering of QE or reductions in central bank balance sheets were too hawkish.

The key to this particular dovish rise was not Carney, He is largely history now given the limited time left on his tenure. The next Governor is now looming into view. Who will it be? The appointment is in the hands of the Chancellor of the Exchequer at the UK Treasury.

And here the minority voting against the rate rise was fascinating. The two heroes who voted against the rate rise were the two Deputy Governors most closely connected to the Treasury, Jon Cunliffe and Dave Ramsden. They are both now well positioned to be the next Governor. I favor and expect it to be Ramsden. He will clearly reverse this rate rise very quickly if necessary. For Americans, these two dissents are rather like both Stanley Fischer and Bob Dudley voting against Janet Yellen.

The market just ignored Carney’s nonsense about “the economy growing above its speed limit” – if only – or Carney’s foolish micro-estimates of the amount of “slack” left in the economy.

When Carney et al cut rates in 2016 from 0.5% to 0.25% in the aftermath of the Brexit vote turmoil, it signified little except that the BoE was following through on its guidance that it would ease substantially in the event of a Leave win. GBP collapsed on the night as markets had already taken Carney at his word. Monetary policy was already significantly eased by the time the BoE cut rates and restarted its bond-buying program.

Likewise, this rate rise was signaled months ago as evidenced by the worrying rally in GBP over the 2nd quarter. This rally has slowed nominal GDP growth that had nicely recovered following the 2016 monetary easing. What was not signaled was the authority of the twosome who voted against the rate rise.

One of the benefits of raising rates a little is that the BoE can easily switch back to signaling they can cut them again. If a “No Deal” Brexit looks more likely over the next few months then the BoE will most certainly have to start signaling an easing again.


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