Sterling, McCafferty, And BOE Policy

Sterling’s advance today is being attributed to comments by a member of the Bank of England’s Monetary Policy Committee McCafferty. However, we suspect it was a news item that was used to justify the price gains that was already underway.  

Sterling had been sold to a two-week low early yesterday as BOE Deputy Governor Broadbent confirmed our suspicions that he would side more with Governor Carney than the hawkish wing. Sterling rebounded after the employment report. After reaching almost $1.2810, sterling recovered almost a full cent. Today it set the week’s high of $1.2955.  

McCafferty is a hawk. He was part of the dissents in last month’s 5-3 vote to keep rates steady. He had dissented last year, but failed to convince anyone and moved back with the majority. In today’s remarks, he did not say what the BOE would do.He opined on what it should do, which is “think” about reducing its balance sheet.  

First, recall that McCafferty opposed the restarting of asset purchases after last year’s referendum. That he wants an early unwind is consistent, but hardly new. Second, McCafferty said other central banks were considering this. Really? Besides the Federal Reserve, which central banks are considering unwinding QE? Try rounding up the suspects, but there aren’t any. No BOJ, No ECB. No SNB. No Riksbank. At most the ECB is talking about changing its forward guidance risk assessment and, we think tapering its purchases but extending them beyond the current time frame (end of the year).  

The current position of the BOE is that it will maintain its GBP435 bln holdings of mostly government bonds until interest rate normalization was well under way, which it identifies as nearer 2%. Assuming 25 bp rate hikes, that is seven hikes of the bank rate, which is currently set at 25 bp.