Commenting on today’s interest rate decision by the Bank of England, Boulger said: “Most post meeting announcements from the MPC during Mervyn King’s term of office were limited to stating whether there was a change in Bank Rate and/or, in the later years, the QE programme. The rather more enlightening statement issued today following the first meeting chaired by Mark Carney suggests that in future we will be given more titbits on the committee’s thinking immediately after the meeting rather than having to wait 13 days for the minutes.
“One result of this is likely to be more reaction from markets, especially the gilt market, on MPC meeting days, with today providing a prime example following price sensitive comments in the Bank’s statement.
“After Mervyn King’s comments last week that markets had overreacted to Ben Bernanke’s suggestion that the Fed might slowdown its QE programme quicker than generally expected the MPC was clearly keen to reinforce this message by virtue of the following comment after reaffirming that the incoming data over the past couple of months had been broadly consistent with the central outlook for output growth and inflation contained in the May Report: ‘The significant upward movement in market interest rates would, however, weigh on that outlook; in the Committee’s view, the implied rise in the expected future path of Bank Rate was not warranted by the recent developments in the domestic economy.’
“Following this comment gilts and equities have reacted very positively, whereas sterling has fallen. At the time of writing the 5 year gilt yield has fallen 6 basis points on the day to 1.35%, but is still 24 b.p. higher than a month ago. This will take some pressure off swap rates and should stem the recent upward movement in fixed rate mortgage pricing. However, now that it is plain for all to see how rapidly gilt pricing can change when the mood changes yields are unlikely to fall back to previous lows.
“The MPC statement also commented on the Chancellor’s request that next month it considers the case for adopting some form of forward guidance, including the possible use of intermediate thresholds. With Mark Carney’s track record this has all the impression of being a done deal and so either the statement following next month’s MPC meeting and/or the inflation report is likely to provide the markets with plenty of food for thought.
“Fixed rate mortgage pricing is unlikely to fall below the levels reached last month but the recent upward trend from several lenders should be nipped in the bud after today’s fall in gilt yields and swap rates, as this appears to be based on a fundamental reassessment of the interest rate outlook following today’s MPC statement.”
