CROSS ASSET: FX Turnovers

• Two interesting things here: Tenreyro confirming that she thinks Bank Rate is already in contractionary territory. And also saying that her votes for "gradual" rises "do not preclude voting for more forceful rate increases in future, should adverse wage-price dynamics take hold."
• That sounds as though she's likely to continue to vote for a 25bp hike in the upcoming meeting and will need to see evidence of wage-price dynamics before voting for a larger hike.
• This probably doesn't matter too much for markets as she has long been seen as not holding the same view of the central members of the MPC.

Highlights from her Annual Report:

• "In August I thought that at 1.25%, the policy rate was more likely than not to have reached its short-run equilibrium level... But there were two risks also influencing my assessment of the appropriate policy rate. First, the equilibrium rate of interest is inherently uncertain... Second, there are risks around how much the extremely high rate of headline inflation feeds persistently into domestic wage and price setting, as firms and workers try to catch-up with past price rises. This would tend to delay how long inflation takes to fall back to target."
• "In the face of these risks, in August I felt it was appropriate to increase Bank Rate further, above my modal estimate of its equilibrium level. I was aware that the costs of doing so are that it will weaken demand further, and given the lags before policy takes its full effect, increase the likelihood that we oversteer into below-target inflation in the medium term. To limit these costs, I voted to raise Bank Rate to 1.5%, a more gradual increase than the rest of the committee. When close to the equilibrium rate, gradual rate rises allow us to react before we tighten too far into contractionary territory, as we observe the lagged impact of policy and demand on the labour market. They also do not preclude voting for more forceful rate increases in future, should adverse wage-price dynamics take hold.