BOE MPC votes 5-3-1 for 50bps and 9-0 for QT before fiscal easing

BOE Bailey 25 Jan 2022
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The Bank of England’s MPC voted by 5-3-1 in favour for a 50bps rate hike today instead of a much-anticipated 75bps move, with one 25bps vote.

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  • BOE MPC votes 5-3-1 for 50bps and 9-0 for QT before fiscal easing

  • Gilts' initial weakness faded

     

    Bank of England’s MPC hikes 50bps in 5-3-1 vote

    The Bank of England’s MPC voted by 5-3-1 in favour for a 50bps rate hike today instead of a much-anticipated 75bps move, with one 25bps vote completing the nine. Gilts though sold off sharply after the noon announcement today after a 9-0 vote to implement QT and confirmation that the MPC's forecasts do not include the fiscal easing expected to be announced by Chancellor Kwasi Kwarteng on Friday.

     

    The sole voter for a 25bps hike was MPC newbie Swati Dhingra, the LSE economics professor who has taken the slot vacated by departed MPC hawk Michael Saunders. She expressed concerns that recent data had suggested that activity was "already weakening", and the risks of second-round effects from near-term inflation were falling. However, even for Dhingra the decision was between 25bps and 50bps. 

     

    This was the MPC’s seventh hike in a row, its second straight 50bps hike and brings the base rate up to 2.25%. BOE Governor Bailey was in vanguard of the 50bps camp today, while Dave Ramsden, Catherine Mann and Jonathan Haskel were the three hawks who voted for 75bps.

     

    The other big moveable feast cooked up by the MPC today was QT. There had been a range of expectations for the QT program, including it being pared back to as little as £40bn from an original £80bn, to accommodate for an expected sharp rise in gilt supply following tomorrow’s mini Budget .

     

    Instead that earlier forecast of £80bn holds true for now, which will be executed via the old 3-7y, 7-20y and 20y+ buckets used for QE. The BOE said that during Q4 2022 it will sell five QT gilt auctions of £580m per auction (link).

     

    Gilts' initial weakness faded

    The fact that the MPC defied the market's hawks to hike 50bps instead of 75bps failed to detract from the fact that 50bps is – historically – quite a lumpy move. In addition, the reluctance to trim QT despite an awareness that government spending/tax cuts to be presented at tomorrow’s mini-Budget are expected to pump gilt supply up, clearly informed the market’s reaction to today’s MPC.  

     

    Currently 10y gilt yields are +7bps at 3.37% versus -1bps at 3.29% just prior to the MPC. In the front-end, the 5y gilt yield is +7bps at 3.44% versus +5bps prior to the news and the 30y is +6bps at 3.65%, the sharpest turn-around of all after it was -5.6bps at 11:59am. It is seen as susceptible to heavy QT gilt selling.

     

    In swap spreads the 5y is little-changed versus this morning with a 0.7bps tightening, but 10y, which was +5.8bps wider is now just 0.3bps wider at 1.2bps and 30y has gone from +2.7bps on the day to -1.6bps at -47.6bps.

     

    SONIA was mixed after the announcement with reds down by about 5-10 ticks in the reds (front whites are +10-16bps after a 75bps hike today was taken out) but generally the immediate moves post-MPC are all fading. Sterling is a cent stronger at GBP/USD 1.13 but the dollar is softer after the BOJ's intervention. Inflation, with linkers outside both QE and QT, is 1-4bps lower at the very front end but 2-4bps wider further out the curve.

     

    One reason is for the fading of initial moves is that the difference between 75bps and 50bps isn’t much in markets that swing as much as they have done this year. The second is that after tomorrow’s mini-Budget, everything might be very different and market positioning this week has been as much about that as about the MPC.