The Bank of England has said it is surprised at the relatively low likelihood of a 2014 rate rise priced into the market but rowed back from some more hawkish recent statements.
The minutes of the BoE’s Monetary Policy Committee 4/5 June meeting said that option pricing suggested a 15% chance of a rate rise by the end of the year
This ‘relatively low probability attached to a bank rate increase this year implied by some financial market prices was somewhat surprising,’ committee members said, in language similar to that used by governor Mark Carney in a speech delivered at Mansion House last week.
Overall however, the minutes offered a more dovish tone. Sterling slid sharply following the release, falling from a day high of $1.697 to $1.693, a week low.
The FTSE 100 added to earlier gains to rise 0.41% on the day, to 6,793. Benchmark 10-year Gilt yields fell from 2.789% to 2.736%.
Short term interest rates moved to discount the previously expected upward slope of interest rates, although option pricing continued to reflect more than 0.5% of tightening over 12 months.
The vote on rate movements and asset purchases remained unanimous to hold. ‘For some members, the policy decision had become more balanced in the past couple of months than earlier in the year… [but] in the absence of other inflationary pressures, it would be necessary to see more evidence of slack being absorbed,’ said the statement.
‘The risk of 2014 hike is clearly growing,’ said Capital Economics’ UK economist Samuel Tombs.
‘For now, we still think that further downside surprises on inflation and some cooling down of the housing market will delay a rate hike until early 2015 and mean that any increase when it comes will be gradual.'
Saxo Capital Markets senior market economist Nick Beecroft said that after throwing cold water on rate rise talk for much of his first year with Carney at the helm, the minutes supplied more evidence that ‘the supertanker is slowly turning’.
He added that they continued to show deep divisions with the committee however, particularly on the outlook for how quickly growth will use up excess capacity.
‘It was over the vital question of the remaining slack in the economy that the minutes start to betray considerable disagreement between members,’ said Beecroft.
‘Some of the uncertainty reflects a lack of understanding as to why official wages data remain so weak,’ added Chris Williams, chief economist at Markit.
'The conclusion we draw from this is that, if the economy continues to grow strongly in the third quarter, a rate hike by the end of the year is on the cards. The best guess at this stage looks to be November, as this will coincide with the new forecasts published in the Bank’s Inflation Report.’