BoE Could Hit Headwinds After First Hike in 10 Years

2017/10/27
Bank of England

Summary

A November rate hike has been on the cards since the BoE’s meeting in mid-September, but the more pertinent question is what happens next. Is this a “one-and-done” event or the beginning of a traditional hiking cycle?


Kacper Brzezniak
Fixed Income Portfolio Manager

It has been more than 10 years – more than 3,750 days, in fact – since the Bank of England last raised interest rates. This drought has added to increased anticipation that the monetary policy committee will announce a hike at its 2 November meeting.

To be sure, both wages and growth in the UK are continuing to disappoint, but inflation is running well above the BoE’s target – putting the bank under pressure to act. Yet although the markets are 85 per cent sure there will be a hike, we are not quite as convinced: we see around a 60 per cent chance.

Many market-watchers think we could see two or three hikes next year, with one fully priced in by September 2018. Yet several headwinds could block the bank’s path:

  • Growth has been relatively weak this year and appears set to slow down even further in 2018.
  • Inflation is likely to peak in October and then begin to gradually head lower.
  • The markets are pricing in a “soft” Brexit and a lengthy transition period, yet this is looking increasingly less likely. We would therefore expect an extremely negative market reaction to a “no deal” scenario – and if that were to happen, the BoE would be more likely to ease than tighten.

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President Trump to Jerome Powell: You’re Hired!

2017/11/02
Federal Reserve Bank Builiding

Summary

In a long-anticipated decision, President Trump has tapped Jerome Powell to be the next Fed chairman. Although Mr Powell is expected to carry forward many of Chair Yellen’s policies, including the current path of policy normalization, Mr Trump will have many more opportunities to remake the Fed.

Key takeaways

  • Incoming Fed Chairman Jerome Powell is a “continuity” candidate; the markets should appreciate his relatively dovish views
  • As markets react to Mr Powell’s appointment, Treasury yields and the USD may fall, but over time yields should move up
  • A Powell-led Fed may favour fewer and weaker enforcement of regulations, which could support financials; the danger is if this leads to too much risk-taking
  • President Trump could appoint three more Fed governors soon, giving him a chance to largely revamp the Board of Governors by early 2018