We got a dovish hike from the BoE as it seems they will go really slow in raising rates further from here. They think inflation peaks right now at 3% and they expect it to “fall back over the next year.” They also harped highlighted “the decision to leave the EU is having a noticeable impact on the economic outlook.” While they acknowledge “the overshoot of inflation”, “uncertainties associated with Brexit are weighing on domestic activity, which has slowed even as global growth has risen significantly. And Brexit related constraints on investment and labor supply appear to be reinforcing the marked slowdown that has been increasingly evident in recent years in the rate at which the economy can grow without generating inflationary pressures.”
They also emphasized that “All members agree that any future increases in Bank Rate would be expected to be at a gradual pace and to a limited extent.” They however don’t see inflation getting back lower to its 2% target until 2020 yet 2 people still didn’t want to raise interest rates at all. Bottom line, the BoE is rolling the dice on the trade off between higher inflation and the possibility of slower Brexit driven growth by going with the latter even though the former is causing the slower growth as it crimps the consumer.
The pound is down sharply in response as is the 2 yr Gilt yield which is down by 4.5 bps. The 10 yr yield is lower by 5.5 bps.
Peter is the Chief Investment Officer at Bleakley Advisory Group and is a CNBC contributor. Each day The Boock Report provides summaries and commentary on the macro data and news that matter, with analysis of what it all means and how it fits together.