Market Perspectives: In the News

The Bank of England delivers a 25 basis point rate increase

Bank of England

Michiel_de_Bruin_headshotAs widely expected, the Bank of England (BoE) increased its base rate from 0.25% to 0.50% in Thursday’s Monetary Policy Committee (MPC) meeting. The market reaction was initially positive for bonds as the yield on 10-year gilts dropped by around 7 basis points from 1.37% to 1.30%. At the same time, sterling reversed its gains versus the euro and the dollar, dropping by about 1%. The dovish take was that MPC members commented that monetary policy continues to provide significant support to jobs and economic activity, and that future rate increases should be at a gradual pace and to a limited extent. This contrasted with previous hawkish comments.

The BoE has acted in the same vein as other global central banks by delivering a so-called ‘dovish hike’. This is now a well-accepted strategy, aimed at reducing market volatility. However, along with this move, the BoE also followed in the footsteps of the Fed, the Bank of Canada and the ECB in announcing a reduction of monetary stimulus. It shows that, albeit slowly, central banks are gaining confidence that global growth is more self-sustaining and hence policy support, which is still largely accommodative, can begin to be withdrawn.

With regard to any further BoE action, it is likely that Brexit developments will be a key factor in deciding on the future path of rates. Current expectations with regard to a constructive Brexit outcome are muted. More clarity on this front would likely mean that the BoE would follow a steeper rate increase trajectory than is currently reflected in its comments, which at present assume a benign Brexit scenario. In our view, the main risk going forward still lie in rates increasing faster than is currently accounted for by markets.

Michiel de Bruin
Head of Global Rates and Money Markets
BMO Global Asset Management (UK)

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