Dovish market reaction to first BoE hike in a decade - Westpac

"The first UK rate hike in a decade actually impacted markets in a relatively dovish manner as markets reacted to the prolonged period of low rates projected in the Bank of England’s forecasts," Westpac analysts explain.

Key quotes

"Markets had been discussing the potential of “one-and-done” hike form the BoE. Carney and the rest of the more hawkish members of the MPC had been guiding the market towards a November rate hike since August and this was almost taken as a given after the commentary and statement in September."

"Although this is effectively what has been delivered, the slow path of projected future moves saw the market push yields and GBP lower. The “one and done” in the market should have more accurately been labelled “one and done until 2Q’18”. The more protracted path outlined by the Bank is therefore more, if only marginally, dovish than markets had priced."

"Carney’s opening comments stated that the bank’s forecasts were relatively little changed from those released in August. He did underscore that the economy had performed better than previously anticipated and that there is now a lack of spare capacity in the economy with employment at the highest level ever."

"Although the rise in headline inflation is perceived to be on the verge of peaking in the current quarter, in order to bring inflation back to target, they agreed that there was a need to reduce their level of accommodation."

"Carney acknowledged that the first rise in Bank Rates in a decade would increase household debt servicing, but that most mortgages would receive only marginal changes and that the rise in payments for deposit holders would be a positive for the economy."

"The BoE remains highly accommodative and, barring severe surprises, a prolonged and extremely gradual path has been assured over the next year and through the forecast period to end 2020. The slide in GBP, Gilt yields and market rates as well as the relative lift in UK equities are notable but not excessive. Markets have effectively drawn in some of their recent more positive pricing for MPC policies and the now softer stance is likely to persist and so act to cap both GBP and UK rates."