Sterling jumps as the Bank of England holds off from a rate cut

The Bank of England has held rates steady at +0.75%. There had been pricing for a 50/50 chance ahead of the meeting, but the MPC has opted to keep its powder dry for now. What are the key takeaways?

No change to rates as expected by consensus (even if the interest rate swaps were pricing around 50% probability of a cut. The numbers on the MPC voting for a cut have not changed from the December meeting, with two voting for a cut versus the seven on hold. This is interesting as there had been hints that the two dissenters may become three, or even four. This is less dovish than the market had been expecting (6-3) has seen sterling jump higher.

However, there was also a cut to 2020 economic growth expectations, from +1.25% to +0.75%. The Bank of England has also said that whilst there are early signs of growth picking up if that does not happen then interest rates could be cut. Inflation could also take a bit longer to return to the 2% target than previously expected. So, although the BoE has not changed their rate expectations, there still seems to be risks to the downside.

Since the announcement to hold, it is interesting that the Short Sterling Interest Rates swaps markets are pricing 24% probability of a rate cut at the next meeting and are not pricing for a rate cut now until August.

Below are the expectations for March.

Below are expectations for August, the first meeting where the probability is more than 50%.

Market Impact

The market impact has certainly been sterling positive. Cable has jumped over +60 pips since the announcement. The market went too far in pricing for a 50/50 probability of a rate cut. It is now unwinding that pricing.

Technically not there is a continuation of the consolidation triangle, but encouragingly a bullish engulfing candle could now form today (needs a close above $1.3030 to confirm. Resistance comes in at $1.3170 which would be an outlook changer for the near term if breached.