Bank of England sends hawkish signal to markets - Danske Bank

After today’s decision from the Bank of England (BoE), analysts from Danske Bank, think a rate hike in November is a close call and still expect that the central bank will stay on hold this year.

Key Quotes: 

“As expected, the Bank of England (BoE) maintained the Bank Rate at 0.25% and kept the targets for the government bond purchases and corporate bond purchases at GBP435bn and GBP10bn, respectively. In line with our call, the vote count for the Bank Rate was 7-2, but we were caught by surprise by the warning of a possible forthcoming rate hike ‘over coming months’ if underlying inflation moves higher and the unemployment rate moves lower.”

“The tightening bias challenges our view that BoE will stay on hold through Brexit negotiations due to high political uncertainty and slower growth. The policymakers have become more concerned about the combination of unemployment below NAIRU and inflation above the 2% target.”

“As BoE usually acts on the big meetings, the question is now whether it will hike at the next meeting in November or not. We think a hike in November is a close call but given that one condition is ‘a gradual rise in underlying inflationary pressure’, which we interpret as higher wage growth, we still think BoE will stay on hold this year.”

“The incoming labour market and inflation data until the November meeting are going to be very important for BoE’s decision. That said, BoE has consistently overestimated wage growth in recent years and one important assumption in the projections in the August Inflation Report was higher wage growth.”

“Our base case is now a hike in Q1 18, as BoE is less worried about political uncertainty and more focused on economic data. Market pricing seems fair, as a November BoE hike is priced in by approximately 60% and a full hike is priced in by February.”