Odds of an inter-meeting BoE decision rose sharply – TDS

Economists at TD Securities note that the odds of an inter-meeting policy decision by the Bank of England (BoE) have risen sharply following the government's introduction of the "mini-budget" on Friday.

Tail risks of extreme policy moves have risen

"Postponing its Gilt sales programme or hiking Bank Rate seem the most likely options, above any verbal intervention."

"Tail risks of extreme policy moves, like the Treasury over-riding the BoE on rate decisions, have risen. Risks around the rate path profile have skewed sharply to the upside, and a double-digit Bank Rate now can't be completely ruled out."

"With the BoE already behind the curve, an emergency meeting or larger hikes won't do much besides a knee-jerk GBP bounce. The UK already ran one of the G10's highest current account deficits before the terms of trade shock, leaving GBP doubly exposed to capital flight and too little (real) yield pickup. Given lows seen in the trade-weighted broad GBP index over the past ten years, GBPUSD could stabilize around 1.045 in the months ahead, though the nature of the fiscal surprise suggests a risk of a further 15% decline in the currency before accounting for a confidence crisis. We continue to like European pairs lower against the JPY in the months ahead with GBP underperforming CHF and EUR."