BOE: Neutral but just by 8-1 - Natixis

Sylwia Hubar, Research Analyst at Natixis, notes that the BoE voted by a majority of 8-1 to maintain Bank Rate at 0.25% and unanimously to continue to reinvest the proceeds from maturing gilts to keep the quantity of purchased gilts at £435bn.

Key Quotes

“Also, the Committee voted unanimously to continue with the program of sterling non-financial investment-grade corporate bond purchases of up to £10bn.”

“At the MPC monetary policy meeting, to a big surprise, Kirstin Forbes, external member normally with a modest hawkish bias, voted for a 25% interest rate hike, on the grounds that inflation was accelerating rapidly and was likely to stay above target for around three years. Also, she argued there was minimal labor market slack (the unemployment rate at 4.7%) and net trade position was to stay supportive to growth. On the contrary, the remaining eight members continued to consider the current monetary policy stance as appropriate, in particular as pay growth stayed subdued (regular earnings decelerated to 2.3% in the three months to January compared to 2.6% in Q4), which suggested there was still some slack in the labor market. Also, the members continued to expect slowdown in aggregate demand this year due to squeezed household real incomes and uncertainty over future trading arrangements.” 

“The MPC expects inflation to rise above 2% in coming months and peak at around 2.8% in early 2018 reflecting previous drop in sterling. The eight MPC members were still convinced that any attempts to offset fully sterling-fuelled inflation would come at the expense of higher unemployment and even more restrained income growth. Consequently, the MPC continued to seek to balance the trade-off between the speed at which it planned to bring inflation back to the target and the support it provides to jobs and growth. Yet, some members admitted that only mixed evidence of slowing economic activity along with sharply rising inflation has somewhat reduced the probability of more monetary stimulus in the period ahead.”

“Outlook

We expect the BoE to maintain neutral monetary policy stance throughout 2017 and possibly throughout the whole period of Brexit negotiations. Sharply rising UK inflation (likely to reach 2% in February) along with slowing pay increases (2.3% in the three months to January) will gradually cease real wage growth, eating into household purchasing power. We expect that improved external trade position will only moderately add to growth, while in contrast slowdown in household spending (almost 65% of GDP) will have a more pronounced (negative) impact on the economy.”