BoE: Considerable risks? - Rabobank

Jane Foley, Senior FX Strategist at Rabobank, explains that in line with their view, November’s Bank of England 25 bps rate increase was taken by the market as a dovish hike.

Key Quotes

“The MPC’s comment that “all members agreed that any futures increases in Bank Rate would be expected to be at a gradual pace and limited extent” quashed speculation that the Bank could be prepared to follow up with another interest rate move in the coming months.”

“In recent weeks the money market has continued to point to late 2018 as the likely timing of the Bank next policy move.  The market has also implied that there will likely be two additional 25 bps rate hikes over the coming three years.  This was used as a base for the BoE’s forecasts in its November Inflation Report and has been loosely referred to by Governor Carney and MPC member Vlieghe in recent weeks.  That said, the MPC will be keeping a close eye on how capacity constraints develop in the coming months, specifically wage inflation.”

“Also, political developments regarding Brexit are likely to have a significant influence on BoE policy decisions over the next two to three years.  A smooth resolution to EU/UK trade talks could hasten economic activity in the UK and bring forward BoE policy tightening.  That said, we see risk that rates could remain on hold until after the commencement of Brexit in March 2019.”