BoE likely to withdraw some of last year’s stimulus in August? - Natixis

Sylwia Hubar, Research Analyst at Natixis, suggests that it is now very likely that the BoE will increase the Bank Rate by 25bps in August this year despite current weakening momentum in pay growth and household spending

Key Quotes

“The MPC voted by 5 to 3 to keep the Bank Rate unchanged at 0.25%. The Committee has assessed the amount of slack in the economy to be limited, which subsequently has lessened BoE’s willingness to tolerate above-target inflation. Extra sterling losses over the month and unemployment rate at its lowest in more than 40 years persuaded three MPC members about the appropriateness to withdraw “part of stimulus” from last year. It is now very likely that the BoE will increase the Bank Rate by 25bps in August this year despite current weakening momentum in pay growth and household spending.”

“Yet, we do not expect more interest rate increases this year, as domestic cost and demand pressures as reflected by wages and household consumption stay relatively subdued and inflation overshoot is largely explained by the ongoing pass-through from the sterling weakness to import prices.”

“Outlook

• The indecisive general election’s outcome, which although promising of a softer Brexit, has created additional layers of uncertainty not least with respect to the UK’s Brexit strategy. Consequently, we expected the MPC split to stay at 7 to 1 members in favor of current accommodative stance. In contrast, however, additional sterling losses over the month (mainly associated with the elections) have tipped the BoE’s balance more towards controlling inflation. Indeed the previous resilience in the economy and the unemployment rate at 4.6% suggest that the BoE could at least withdraw some of last year’s stimulus next month.
• We predict now that the MPC will increase the Bank Rate by 25bps to 0.5% in August. Yet, we do not expect more interest rate increases this year, as domestic cost and demand pressures as reflected by wages and household consumption stay relatively subdued and inflation overshoot is largely explained by the ongoing passthrough from the sterling weakness to import prices.
• The BoE will consider more tightening once there will be more evidence from strengthening domestic cost pressures (notably wages). A softer, more business-oriented Britain’s exit, if pursued, would allow domestic cost pressures to recover sooner than later, paving a way for the BoE to progressively normalize its policy next year.”