BOE MPC grasps the nettle: Curve bull-flattens, SONIA splits & RPI falls

MPC grasps the nettle with aggressive hike

In a move that was always on the cards but still qualifies as a surprise, the MPC countered critics of its drip-drip approach to inflation management with as 50bps hike today to 5% in a 7-2 vote (link) that received mixed reviews.

Headlines in some quarters are already calling for Bailey to quit after what they see as another failure of communication, although given the GBP fixed income market as recently as yesterday was pretty evenly split between pricing in 25bps or 50bps, that seems harsh.

Less shocked was the market itself, which despite having tilted roughly 65:35 towards 25bps in its pricing this morning, mostly offered a muted response to the news in terms of price action after the initial knee jerk moves. The 2y gilt yield is unch at 5.04% at the time of writing, while 10y and 30y yields are both -5bps at 4.35% and 4.47% as the curve bull-flattens     

Swap spreads are mixed except for the front end, where after a slow reaction initially, the 2y ASW is -6bps at  51.5bps, 10y and 30y are both +1bp.

In inflation, RPI swaps have taken back some recent, post-data strength as the BOE tries to get ahead of the curve and squeeze the economy, with oil and gas futures softer in the background. RPI is  -9bps in 1y at 4.18%, -13bps at 4.17% in 2y, -5bps in 10y at 3.92% and -2bps at 3.42% in 30y, again a temperate reaction that will please the MPC.

The exception to all this moderation is the SONIA futures strip. The front end has adjusted to the 50bps instead of 25bps outcome with a drop of 19 ticks in Sep23, but Dec24 has rallied 10 ticks. SONIAs still imply a peak for Bank Rate of about 6.10% in Dec23 but now foresee a slightly quicker fall to about 5.32% by Dec24.  

The members of the MPC will undoubtedly fan out to defend/explain their decision over the next few days and hours. The Guv’nor himself said  today“if we don’t raise rates now, it could be worse later.” A lot of traders are today wondering just what ‘later’ is going to look like.

But is 50bps a panicky case of overkill?

Indeed, shortly before the decision, one swapper today said that 25bps would be a far better outcome for the UK than 50bps, and wondered if Bailey & Co. were proving too susceptible to political pressure and media panic regarding risks to the housing market.

The trader said that “the BOE is in a very tough spot. A 50bps hike sends a strong signal but in the mortgage market, which a lot of this is about, people are quick to refinance rising mortgages to interest only or by extending mortgage loans down the curve, which at least might bring mortgage payments that have risen from £500 a month to £2000 back down to, say, £1250 (blunting the impact).”

Meanwhile, he said, given the lagged effect of hikes, a lot of the tightening that the MPC has voted for this year has yet to feed through in terms of economic impact. Now there’s a risk of the impact being felt hardest when it is perhaps less needed, while incremental 25bps hikes would have allowed the BOE to assess the damage as it was being inflicted without going nuclear, he argued. "Hikes of 25bps allow time for their impact to be assessed,” he contended.