BOE challenges current market pricing.

The decision feels like a softer approach compared with previous meetings, and a key shift in focus from growth to inflation. The key thing today was the pushback on market pricing, in that even if we need further hikes (which we do but likely 50bps or 25bps in the voting skew) they will likely reach a LOWER PEAK than is priced. This makes me think a few things.

1) clearly FX markets care about terminal rates and not necessarily the pace of hiking – USD is higher in response to ‘slower pace but higher terminal rate’ and GBP is falling in response to ‘faster pace but lower peak.’

2) we are about to get a fiscal surprise. Yes we expect a change in policy from that initially set out by Liz Truss and Kwasi Kwarteng, but it looks like they are going to do a lot of the heavy lifting on the fiscal side to tighten financial conditions. Also there is a potential risk of overcompensation.

3) both the BOE and the gov are wary of the influence bond markets. This was seen a few weeks ago, but the push back on the market-implied-terminal rate suggests they are trying to take back control of messaging, as well as stabilise the market curve that underpins the forecasts.

4) Andrew Bailey has mentioned the word ‘mortgage’ a lot – clearly he is concerned about the impact of today’s rate rise on the housing market.