Divining the Bank of England’s ‘tone’ the new market mover

Comment Martin Flanagan

We used to parse Bank of England monetary policy committee (MPC) votes like Kremlinologists for minor alterations in the split voting on interest rate policy. We have moved on. A dovish or bearish “tone” on future monetary policy now clearly trumps the vote itself. Voting numbers tell you where we are today, the tone suggests where we may be a few months hence, and financial markets always like to be ahead of events, not just holding the ring.

Hence sterling’s strong rise on the forex markets yesterday when you might have expected a 9-0 MPC vote to keep rates on hold would dampen excitement.

In terms of interest rates guidance, lower-for-longer seems to have been finetuned to further-and-faster. The Bank’s more bearish tone has been brought about by the prospect of stronger UK economic growth in 2018 – it will still be subdued, everything is relative – as we benefit from a freshening breeze in the gobal economy.

That and currently stubbornly high UK inflation of about 3 per cent, compared with a government-mandated mid-term target of 2 per cent.

The background mood has shifted. Brexit uncertainty will remain a kneeject unpredictable element on the UK’S underlying economic prospects.

But the Bank clearly believes the UK economy is stronger now than it believed was likely in the aftermath of the 2016 vote to leave the EU. It is therefore striking the right “tone”. Pernod Ricard’s increased full-year profits forecasts, after impressive first half results, are a further indicator of a spirits industry in reasonably fine fettle. For the sector, the Asian jitters of yesteryear have subsided, the American market is decent and Europe is holding its own.

Obviously, it helps when you have a stable of cachet brands as Pernod Ricard does, with the likes of Jameson whiskey, Martell cognac and Absolut vodka.

First half sales rose 5 per cent, and the full-year profits forecast growth range has been upped to between 4 and 6 per cent from a previous 3 to 5 per cent.

Like its rivals, Pernod Ricard has warned that it is not immune from the adverse currency impact of a fall in the value of the US dollar against the euro. But, that caveat aside, the story is a good one.