EURGBP: Monetary policy in focus – Lloyds Bank

Recent comments from BoE and ECB speakers have carried a distinctly less ‘dovish’ tone, which leaves the monetary policy outlook looking less one-sided than previously envisaged, according to Gajan Mahadevan, Quantitative Strategist at Lloyds Bank.

Key Quotes

“In recent weeks, there has been a notable shift in policymaker rhetoric, which has led to some significant moves in interest rate expectations. In the aftermath of June’s BoE policy meeting – at which there was a close 5-3 vote to leave the Bank Rate unchanged – there has been a shift in tone from key MPC members. This began with Chief Economist Andrew Haldane suggesting he could vote for a rate hike “in the second half” of the year. Subsequently, Governor Carney outlined that if the economy continued to hold up, it may become necessary to take back some stimulus. However, these messages were in contrast to that delivered by Deputy Governor Ben Broadbent, who indicated he is not yet ready to support higher interest rates. All considered, the rates market has brought forward its expectations of a UK Bank Rate hike, with the first “fully priced” 25bp increase currently at May-2018 (compared to May-2020 prior to June’s MPC meeting).”

“At the same time, the ECB has also adopted a less ‘dovish’ stance, removing reference to “lower” rates within its forward guidance. Furthermore, Governing Council members, including President Draghi, have talked up the resilience of the Euro area economy. In fact, at its last meeting, the ECB revised up its expectations for GDP growth to 1.9% in 2017 (LBCB: 2.0%) and 1.8% in 2018 (LBCB: 1.6%). Similarly to the BoE, the risk to the ECB’s monetary policy outlook is now skewed towards tighter, rather than looser, policy.”