Bank of England Tries Channeling St. Augustine

(Bloomberg Opinion) -- U.K. investors shrugged their shoulders at the very slightly hawkish tone from Thursday's Bank of England meeting. As there is no pressing need to hike rates now, Brexit can resume its place as the main driver for gilts and the pound.

The Monetary Policy Committee unanimously left benchmark borrowing costs unchanged at 0.75 percent, and said hitting the 2 percent inflation target would likely require more than one rate hike over the three-year forecasting period. Nothing will be happening on this front in 2019, says Dan Hanson at Bloomberg Economics.

The bank seems to be channeling St. Augustine: It wants to raise rates at some point, just not today. That sterling and gilt futures are little changed on the day shows that it has managed a very difficult communications job well.

This was the BOE's first forecasting round since Brexit was postponed. It also follows the latest Federal Reserve move toward a more dovish stance, and a run of promising economic data from the euro area. This could have been an opportunity for Governor Mark Carney to remind investors that officials always have the option to tighten policy if needed.

But he faces the same problem we all do: Nobody knows what's going to happen with the split from the EU. The best course was for the central bank to do nothing, and suggest nothing. Carney managed to inject a little bit more awareness of the bank's powers into the interest-rate futures market, which is sound practice, but any more than that would have cost him a serious amount of credibility.

In the short term, the most important thing for the U.K. government bond market is the next wave of supply. The Treasury will sell 3 billion pounds ($3.9 billion) of 2024 securities next week, and offer an ultra-long syndicated bond, probably for at least 5 billion pounds, the week after. This will encourage the yield curve to continue to bear steepen, with long-end yields rising faster than short maturities.

The only thing that will really cause that market, or sterling, to budge will be a significant development in the negotiations over the split from the European Union. The fog of Brexit looks like it is keeping the BOE from any rash decisions.

To contact the editor responsible for this story: Jennifer Ryan at jryan13@bloomberg.net

This column does not necessarily reflect the opinion of the editorial board or Bloomberg LP and its owners.

Marcus Ashworth is a Bloomberg Opinion columnist covering European markets. He spent three decades in the banking industry, most recently as chief markets strategist at Haitong Securities in London.