Divyang Shah, IFR Senior Strategist
The BoE seems to have missed a trick by ruling out the potential for additional QE and showing acceptance of the recent tightening in financial conditions.
For a central bank that has recently embraced forward guidance their comments are simply helping to support market suspicions that the risks lie toward an earlier tightening of monetary policy.
Forward guidance was supposed to help the recovery by providing markets with additional information so that they did not jump the gun in pricing in a higher rate path than what the central bank expects. In theory this would help nourish a nascent recovery and allow more time for economic slack to be worked off.
The BoE MPC have found it tough to add credibility to their forward guidance but the task is made difficult by the MPC talking up the impact of continued positive data surprises and accepting the tightening in financial conditions.
There was a time when the BoE felt that market pricing was “not warranted” and were willing to deliver additional QE.
The advantage of keeping the QE door open and not fully embracing tighter financial conditions is that it creates a policy asymmetry. Without this asymmetry even those who feel that the BoE will keep rates unchanged will have nothing else to play for beyond trying to time when the first rate hike will occur.
If and when the Fed does finally taper, the BoE will find it more difficult, compared to the ECB, to keep its money market curve from steepening.
With the potential for the budget battle in Washington to get messy we are inclined to stay flat at this stage but we are looking to play for a steeper GBP money market curve by paying 1y1y GBP or 12x24 SONIA.