🏦🇬🇧Cable FX Macro Weekly Note: BoE Bank Rate Decision

**As seen in Risk In The Week report 10/28/22, subscribe at cablefxm.co.uk/reports

It feels like the last time the BoE met was a decade ago, we do not want to play down the previous rate decision and the remarks, but a lot has happened since then. The central bank headed into the meeting with abnormal volatility in GBP denominated markets, the chancellor of the exchequer and the BoE scheduled weekly meetings to coordinate policy as yields spiked higher alongside with U.K. credit default swaps. Aside from short episodes like COVID, I have not seen markets behave this way in the G10, sterling plunged below 1.10, gilts were massively offered and yields posted record moves, the developments looked more like emerging market price action. This is where “Great British Peso and Mexican Pound” comes from.

Some desks have penciled an aggressive BoE as the bank rescheduled its meeting to late September, this would defend the pound and stabilize gilt markets. Market pricing saw the central bank delivering 275bps of additional tightening by May, this would take the tightening cycle peak to 4.5%. Finally, the day came and the BoE took the Bank Rate to 2.25%, a 50bps move, below market expectations. This signaled that the bank would not blink to a plunging pound and volatile markets. The voting was split, 3 officials wanted a larger move, one voted for 25bps, and five voted for a 50bps. Something that alarmed markets was the BoE announcing it was set to begin Gilt sales from Oct. 3, this move was later reversed as it launched a special Gilt purchasing programme to reduce volatility derived from the ‘mini-budget.’

The desk at Morgan Stanley pared back its 100bps call for the November meeting, it now sees a 75bps move from the BoE, the revision is said to be a result from the pivot in the government’s fiscal stance. Morgan Stanley said that the meeting is a close call, however, it warned that there might be less tightening ahead relative to market expectations as the bank holds a stricter outlook for U.K.’s fiscal policy. Another bank joining this call is ING, they say it is unlikely that the Bank Rate goes above 4.0% in 2023, suggesting that the market is currently overshooting policy tightening. ING expects the November meeting to bring a 50bps move from the central bank.