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Fear and loathing

The Bank of England fears inflation but loathes doing anything about it. Today it hiked by 50bps to 5.0%, with the customary 7-2 split with the usual suspects backing a hold.  

They’ve gone big today but are hardly leaning into the market pricing towards 6% - guidance is still pretty nebulous...I find it hard to think they will stop now with core inflation where it is…but they continue to point to lagged effects and don’t want to commit and send market pricing even higher. 

 

Nutshell: The MPC is in panic mode and probably thinks that by going big today they can trim a few bps of the eventual terminal rate...maybe that ought to have been the thinking from the very start of the hiking cycle. This ought to have been the approach from the start to get in front of the steam roller. I think we call this the recession hike – throw in the towel, admit you cannot get a soft landing and create a recession to tame inflation. 

  

Key points  

  • Tenreyro and Dhingra vote for no hike (!!!)  
  • Bank says inflation persistence would require further tightening...duh 
  • Members pointed to the ‘scale’ of upside surprises on inflation and wages – totally blindsided, which is shocking
  • Starting to pay attention to the inevitable wage price spiral...but still thinks price and wage pressures will ease 
  • Key phrase here on second round effects: “The MPC recognises that the second-round effects in domestic price and wage developments generated by external cost shocks are likely to take longer to unwind than they did to emerge” … But the BoE is still adamant that inflation will fall: “Core goods CPI inflation is expected to decline later this year, supported by developments in cost and price indicators earlier in the supply chain.” 

  

Market reaction  

  • Market pricing evens chance that BoE goes to 6.25% now, implying another 125bps of hikes – bank still doesn’t think it gets there but it didn’t think it would need to go to 5%
  • Gilt yields spiked briefly before moving lower with the 2yr under 5% and 10yr getting pummelled to 4.28% from around 4.40% earlier this morning...further inversion pointing to recession...bounced a bit from the lows but trades below the morning levels  
  • Sterling shot higher, but gains pared back with cable back to under 1.28 sharply...recession is not good for the pound, down on the day to 1.2760 area, touching LOD at 1.27370. 
  • Bad day for stocks anyway – FTSE 100 off the lows of the day but down 1%. FTSE 250 makes new low post announcement – recession indicator  

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