London Calling: The BoE Rate Decision

With the rate hike already priced in it strikes me that the statement accompanying the decision may be of relevance. Here's the August statement:

Quote

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News Release

Bank of England Raises Bank Rate by 0.25 Percentage Points to 4.75%

3 August 2006 The Bank of England's Monetary Policy Committee today voted to raise the official Bank rate paid on commercial bank reserves by 0.25 percentage points to 4.75%.

The pace of economic activity has quickened in the past few months. Household spending appears to have recovered from its post-Christmas dip. Business investment growth and investment intentions have also picked up. In the United Kingdom 's main export markets growth has remained robust. As a result, over the past few quarters GDP growth has been at, or a little above, its long-run average and business surveys point to continued firm growth. The margin of spare capacity in the economy appears small.

CPI inflation picked up to 2.5% in June, and is expected to remain above the 2.0% target for some while. Higher energy prices have led to greater inflationary pressures, notwithstanding muted earnings growth and a squeeze on profit margins. Although the path of energy prices is extremely uncertain, energy price inflation is expected to moderate in the medium term. But some recovery in profit margins and pay growth is likely to mean that consumer price inflation will move only gradually back to the target.

Against the background of firm growth, limited spare capacity, rapid growth of broad money and credit, and with inflation likely to remain above the target for some while, the Committee judged that an increase of 0.25 percentage points in the official Bank rate to 4.75% was necessary to bring CPI inflation back to the target in the medium term.

The Committee's latest inflation and output projections will appear in the Inflation Report to be published on Wednesday 9 August.

The minutes of the meeting will be published at 9.30am on Wednesday 16 August.

Note to Editors

The previous change in interest rates was a reduction of 0.25 percentage points to 4.5% on 4 August 2005.

Notice the emphasis on high energy prices. With oil prices below $60, this week's statement could be more bearish. I think the market has got ahead of itself in pricing in 5.25% by next year.

Remember, when the B0E hiked the rate in Aug-that was a surprise, as they were tipped to hold. With the growth in their GDP-I would tend to doubt a really dovish statement, but u never know. Their economy is expanding at a much faster rate the ours.

You might be right about pre-mature pricing-in of a 2nd rate increase...the statement should shed some light there. I'll feel more certain of a bullish statement if I see the London traders are still in their long positions and I'll feel the opposite if they're gone. My own opinion is that CB's would prefer to do nothing but make hawkish statements if at all possible...

hmmm....wud that be good. ..........
Who cares ... i will be making money either way if it collapse of rises....

I think the best way to trade this is to see how London is thinking in tomorrow's session. A 2nd rate increase is in play they could buy into this. A hawkish BoE statement might see the 9110 resistance broken.

i have a feeling that when london open gbp/usd moving up because traders start buying what do you think?

With the increasing prospects of democrats winning the senate, there's a lot of $- sentiments in the air.
A lot of traders are still holding onto their long GBP/USD positions.
I wonder if we will see a surge of profit taking after BoE statement and BEFORE US trade balance.

Agreed-the dems winning the senate is a definate factor in this-and yeah the profit taking could come then. Don't forget about the resistance in the lower 9100's as it could be a starting point for a nice ride down.

These London guys got doubly lucky this week as their bullish sentiments (fueled by the BoE) were supported by the results of the mid-term elections. Talk about a fundamentally driven market!

I came up with a tabulation of UK's CPI, and projected 12 month CPI.


Last August, BoE said that CPI climbed up to 2.5%..
my tabulation above showed an annualized CPI for May and June was beyond the target ...

Since the last Rate Hike, annualized CPI dropped significantly with a -0.1, 0.4 and 0.1 CPI since..

However, Their target is only 2.0% so the last numbers are beyond the marks..

Here are some analyst comments on the decision and statement. Hope they are of use:JAMES KNIGHTLEY, ECONOMIST, ING

"There appears to be little to suggest they feel further aggressive tightening is required especially since they believe inflation to 'fall back as energy and import price inflation abate'.

"For now, with lead indicators suggesting growth is peaking and with energy prices effects set to push headline CPI substantially lower, we are yet to be fully convinced of the need for further monetary tightening."

JODIE SAUL, ECONOMIST, CIBC WORLD MARKETS

"The accompanying statement is not particularly revealing, noting that 'household spending has been volatile, but underlying picture of moderate expansion' while 'inflation is expected to rise further above target in the near-term, then fall back.'

"We believe that a further pre-emptive 25bp policy tightening was justified today (just) as inflation fears persist on the MPC and considering the above trend growth environment reported for Q3. Yet, looking further ahead, we cannot buy into a more aggressive monetary policy outlook for next year.

ROGER BOOTLE, ECONOMIC ADVISER, DELOITTE

"It is likely that interest rates will have to rise to 5.25 percent early next year in order to keep inflation under control.

"The growth of the money supply was cited as a contributory factor to today's decision to raise interest rates in the statement published by the Bank.

"The Committee appears very keen to pull out all the stops to ensure that rising inflation does not spill over into higher wage growth and a pick-up in inflation expectations."

ALAN CLARKE, ECONOMIST, BNP PARIBAS "The statement was pretty balanced, neither showing a strong desire to do more, but leaving the door open if necessary. The language on growth was not alarmist, talking a moderate expansion.

"Importantly, while the Bank suggests there is only limited spare capacity in the economy, there is at least some spare capacity. In the context of moderate growth, this suggests that the Bank is not too worried about output rising to far above potential and creating upside risks to core inflation."

"Overall, we believe that although the Bank will maintain a bias to hike, the Bank is in no rush to deliver."

PHILIP SHAW, ECONOMIST, INVESTEC

"On balance we still judge that rates have topped at percent. However the MPC will be on amber alert and will remain wary of any poor inflation news, such as higher wage settlements, over the winter."

MALCOLM BARR, ECONOMIST, JP MORGAN

"The statement alongside the decision has a less hawkish tone than in August - growth is still characterised as firm, but the outlook for export markets is 'positive' rather than 'robust', and the rise in unemployment gets an explicit mention that was absent in August.

"The key issue for next week (Quarterly Inflation Report) is whether the MPC vindicate a market which has fully discounted a near term move in rates up to 5.25 percent by showing inflation steady at 2 percent in the central forecast.

GEORGE BUCKLEY, ECONOMIST, DEUTSCHE BANK

"The accompanying statement provided few clues on rates going forward, however, although perhaps understandably this statement has been toned down relative to that published at the August meeting.

"The Bank describes growth as having been firm, and acknowledges the volatility in consumption (the MPC seem to be looking through Q3 weakness in retail sales, arguing that underlying spending growth is "moderate" versus "recovering" in August).

RICHARD SNOOK, ECONOMIST, CEBR

"Today's decision was widely expected and has already been factored in by the markets. The question now is whether interest rates at 5.00 per cent will be sufficient to bring CPI inflation back towards the Bank's 2.0 per cent target.

"As high commodity prices continue to filter through the economy it is likely that interest rates will have to rise again in early 2007 if inflation is to be tamed."

ANDREW MCLAUGHLIN, CHIEF ECONOMIST, RBS

"The decision to raise the Bank Rate to its highest level since August 2001 came as no surprise. The question is: how will it affect the UK's households and companies, who have borrowed an additional 76 percent and 70 percent, respectively, in the intervening five years?

"The coming pay round will be crucial for what happens next. If wage bargainers show restraint, then 5 percent will probably be the peak. But households and companies would do well to heed the warning from futures markets, which are pricing in a hike to 5.25 percent in 2007 - a reminder, as if we need one, that risks on rates are skewed to the upside."

MILAN KHATRI, RICS CHIEF ECONOMIST

"By acting in a timely manner, the modest rise in interest rates will help to cool the housing market but at the same time promote wider economic stability and prevent inflation pressures building.

"Today's interest rate rise, together with possibly one more in early 2007, should help to produce a "soft-landing" for the housing market, giving rise to a more stable market environment for buyers."

HOWARD ARCHER, ECONOMIST, GLOBAL INSIGHT

"The 25 basis point interest rate hike was universally expected, but the Bank of England's statement gives few clues on whether interest rates are likely to head higher in 2007.

"Next week's November Quarterly Inflation Report may shed more light on this.

"We currently still forecast the Bank of England to keep interest rates at 5 percent through 2007, as we expect softer growth and significant slack in the labour market to limit inflationary pressures through containing wage increases and constrict the ability of firms to push through price increases.

Comments obtained before the decision:

ADAM LENT, HEAD OF ECONOMIC AND SOCIAL AFFAIRS, TUC

"No-one will have been surprised by today's rise. But if it is the start of an upwards trend, then there is cause for concern that this will damage the competitive economic climate that UK industry needs.

"And there will be real anger if further rate rises flow from overheating in the South East caused by the impact of top executive pay and mega-bonuses in the City."

IAN MCCAFFERTY, CHIEF ECONOMIC ADVISER, CONFEDERATION OF BRITISH INDUSTRY

"Although some commentators are already looking ahead to the next rise, our forecasts suggest that a further increase should not be needed. Consumer appetite for debt is falling rapidly, the economy is showing some signs of a modest slowdown, and the benefits of recent falls in oil prices will help keep inflation under control into the medium term.

"The Bank may face some difficult decisions in coming months as shorter term risks to inflation remain. But it must also be mindful of the slower growth that a further rise could create."

DAVID KERN, ECONOMIC ADVISER, BRITISH CHAMBERS OF COMMERCE

"British business has been resigned for some time to the prospect of higher interest rates and we understand the reasons that have led the MPC to take this decision.

"The arguments for this increase however were finely balanced and were not as conclusive as commonly believed.

"To avoid causing serious long-term damage to the economy, it is critically important for the MPC to make it as clear as possible that further increases in rates would not be contemplated in the foreseeable future."

GRAEME LEACH, CHIEF ECONOMIST, INSTITUTE OF DIRECTORS

"This was always a done deal and rightly so. Rapid monetary growth poses a significant risk to inflation in 2007-08, given that capacity utilisation across the whole economy is tight.

"Without a base rate rise, the pick-up in house price growth was likely to encourage an acceleration in housing equity release, pouring further fuel on the inflationary fire next year.

"The Bank of England has taken the view, sensibly, that both companies and consumers needed chastening. This may not be the last rate rise either."

MARTIN TEMPLE, DIRECTOR GENERAL, ENGINEERING EMPLOYERS FEDERATION

"This decision was always going to be tight but we believe the evidence remained against a rise. With a weakening United States likely to slow growth in the UK and spare capacity in the labour market the Bank could still have stayed its hand. We regard talk of a further rise in the New Year as misguided and unhelpful."