Back
6 Nov 2015
GBP: More cautious than but not as dovish as many think perhaps - MUFG
FXStreet (Delhi) - Derek Halpenny, European Head of GMR at MUFG, notes that the yields in the UK and the pound are both lower again this morning in response to the more dovish than expected ‘Super Thursday’ yesterday.
Key Quotes
“We have read in many places that the BOE has “endorsed” market expectations of a rate increase not coming until Q1 2017 or that the BOE has signalled continued unchanged policy until 2017. This really is not the case at all.”
“Yes, the market rates assumed in projecting inflation going forward were considerably lower than the rates used three months ago but as Governor Carney stated the positive impact of those lower yields was offset by falling equity prices and widening credit spreads. Overall financial market conditions hadn’t in fact changed dramatically from the context of projections for inflation. The key change was in fact the lower medium-term assumptions made by the BOE in regard to global demand, based not only on lower assumptions for growth in China but emerging markets in general.”
“But despite these lower global demand assumptions, the point forecasts for inflation in two and three years were actually higher than in August. The 2-year inflation projection moved up from 2.03% in August to 2.06% while the 3-year projection went up from 2.14% to 2.22%. Those projections leave very little wiggle room and come February there is a strong possibility that the BOE may need to be more explicit on market expectations."
“Our take-away from this is that we were correct to push back our call for the first rate increase from February to May. February is clearly off the agenda now. But Carney also stated yesterday that it would seem “prudent” to plan for a rate hike in 2016 and we believe that May is still “live” (sorry Janet!). By the turn of the year, the BOE will have a lot clearer a picture on how the financial markets (or perhaps the pound!) have responded to a probable Fed rate increase and ECB easing and may be better placed to then signal more confidently the potential for action later in 2016. The QIR in February could then be used to signal action in May.”
“Over the very short-term, the pound may continue to underperform but yields are unlikely to go lower from here and pound gains, particularly against the euro are still likely as we move toward year-end.”
Key Quotes
“We have read in many places that the BOE has “endorsed” market expectations of a rate increase not coming until Q1 2017 or that the BOE has signalled continued unchanged policy until 2017. This really is not the case at all.”
“Yes, the market rates assumed in projecting inflation going forward were considerably lower than the rates used three months ago but as Governor Carney stated the positive impact of those lower yields was offset by falling equity prices and widening credit spreads. Overall financial market conditions hadn’t in fact changed dramatically from the context of projections for inflation. The key change was in fact the lower medium-term assumptions made by the BOE in regard to global demand, based not only on lower assumptions for growth in China but emerging markets in general.”
“But despite these lower global demand assumptions, the point forecasts for inflation in two and three years were actually higher than in August. The 2-year inflation projection moved up from 2.03% in August to 2.06% while the 3-year projection went up from 2.14% to 2.22%. Those projections leave very little wiggle room and come February there is a strong possibility that the BOE may need to be more explicit on market expectations."
“Our take-away from this is that we were correct to push back our call for the first rate increase from February to May. February is clearly off the agenda now. But Carney also stated yesterday that it would seem “prudent” to plan for a rate hike in 2016 and we believe that May is still “live” (sorry Janet!). By the turn of the year, the BOE will have a lot clearer a picture on how the financial markets (or perhaps the pound!) have responded to a probable Fed rate increase and ECB easing and may be better placed to then signal more confidently the potential for action later in 2016. The QIR in February could then be used to signal action in May.”
“Over the very short-term, the pound may continue to underperform but yields are unlikely to go lower from here and pound gains, particularly against the euro are still likely as we move toward year-end.”