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Market certainty in doubt ahead of the MPC

20 October 2017 by Gary Kirk

Mark Carney’s recent hawkish rhetoric is well documented regarding the higher UK inflation as a result of the de-globalisation effect of Brexit. This has fuelled the speculation that a reversal of the emergency rate cut following the UK referendum is about to be announced at the 2nd November meeting of the MPC, which will be the first UK hike in a decade. Indeed the probability of a 25bp hike in the November meeting is currently 78.6% rising to 81.5% by the 14th December meeting (source: Bloomberg), hence it would be a shock to hear rates remaining on hold.

However, the balance of the debate at the MPC may have shifted with the introduction of the two latest members, Sir David Ramsden and Silvana Tenreyro. Ms Tenreyro, who was appointed to replace Kristin Forbes (a hawkish member), recently commented that she might back a rate hike “in the coming months, if inflation builds in the labour market”, while Ramsden (appointed in September)  said he was not part of the BoE policymakers who believe a rate hike is likely to be needed in the coming months. These more cautious comments ahead of the key policy meeting in just over a week’s time have helped 10yr gilt yields decline back down to c1.30% as Mr Carney now appears to have two additional ‘doves’ in the committee to persuade.

To add to the uncertainty, in an interview yesterday, Deputy Governor Sir Jon Cunliffe responded to a question about the November hike by saying “For me, when that process starts is a more open question and my decision will be based in large part on whether I see domestic inflation pressures and what I see happening to pay in the economy…….the economy is growing but not as fast as last year”. He then went on to say the economy is employing more but “we are not seeing pay pressure and for me we are not seeing sustained signs of domestic inflation pressure”.

So despite the market expecting a hike, the debate in Threadneedle Street may not turn out to be such a foregone conclusion. For us the decision either way is not an easy read and as such we consider it prudent to be un-invested in Gilts until there is greater clarity.

 

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