*BEAN: BOE WILL WITHDRAW STIMULUS IF CPI OUTLOOK OVERSHOOTS 2%
*BEAN: BOE WOULD LIKELY SELL ASSETS ONLY AFTER RATE RISE
*BEAN: BOE LIKELY TO RAISE RATE FIRST AS PART OF EXIT STRATEGY
With the inflation report out in a few weeks (12th August) it seems a bit odd to give such a specific criterium for the exit (which he explicitly says will be in the form of rate hikes). In their May inflation report, the central tendency for CPI was about 1.5%, and while this is quite a way from 2%, it's not hard to see this being revised significantly higher after the developments of the past few months. Commodity prices have risen significantly (Oil & Copper both +25% since the May report was prepared), the housing market & financial markets have stabilised (though these may turn out to be transitory developments), and the MPC have been repeatedly confronted by upside surprises to CPI. All of the above point to this risk.
It's not the first time that policymakers have opined on their exit strategies, but this is interesting in that it contains specific criteria for their enaction, and is in stark contrast to that of the Fed (whose argument centres around the (very large) output gap). The MPC have a history of their actions being guided by their inflation forecast, which being model driven is obviously far from perfect. Do I think they should raise rates? Definitely not - we are in a Balance Sheet Recession. But that is not the point. Do I think they will raise rates if their (imperfect) model suggests above-target inflation? Absolutely. And I think ignoring this subtle change in their communication strategy is dangerous, and if the inflation report does in fact show this, then Short Sterling will crater.Positioning in short-end carry trades has once again built up to be quite significant, and while leveraged positions are generally not as big in the bond market as before the 1994 Bond Market Massacre, it is still easy to imagine a scenario where the Reds & Greens sell-off 100-200bps. In conclusion, I think you can sell Short Sterling both outright and against Euribor (a lower risk version of the trade that doesn't pay away as much carry, and Short Sterling will underperform in a sell-off).
