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UK CommentNo new signals from the Bank of England

  1. BoE assessment broadly unchanged
  2. We still think the BoE is too optimistic about GDP and wage growth
  3. We expect the bank rate to remain unchanged at 0.5% over the next two years
BoE assessment broadly unchanged
As expected, the monetary policy committee (MPC) of the Bank of England (BoE) decided to keep the policy rate unchanged at 0.5 percent today. The decision was unanimous. The MPC also voted unanimously to maintain the stock of corporate bond purchases and UK government bond purchases. Also as we expected, the language describing the outlook and the monetary policy assessment was left broadly unchanged. The BoE noted that recent news in macroeconomic data had been mixed and relatively limited, but that, overall, the general assessment of demand growing at a pace just above its reduced rate of potential, thereby generating a gradual pick up in domestic inflationary pressures, seemed intact. Regarding the short-term outlook, the BoE noted that some activity indicators had suggested GDP growth in Q4 might be slightly softer than in Q3. The labour market had remained tight and surveys had suggested that would continue. Earnings growth had been broadly as expected. The MPC continued to expect wage growth to pick up in the early part of next year, but noted that there remained uncertainties about that projection. The MPC judges that inflation is likely to be close to its peak and will decline towards the 2% target in the medium term. Regarding Brexit, the MPC noted the progress in negotiations between the UK and the EU and said it now anticipated a transition period being put in place. The MPC expected that to reduce the likelihood of a disorderly Brexit.
We still think the BoE is too optimistic about GDP and wage growth
The BoE still expects monetary policy to be tightened further over the next couple of years, but in November the MPC noted that “any future increases in the bank rate are expected to be at a gradual pace and to a limited extent”. The committee also noted that it will “monitor closely the evolving economic outlook, including the impact of last month’s increase in the bank rate” and stands ready to respond should that be necessary. To sum up: no new signals from the BoE today. The economy is performing broadly as expected and no new rate rises are expected soon. As of now, market pricing indicates that the first hike from the BoE is expected by September next year and one more hike is priced in by the end of 2019. Our expectation is still that Brexit will result in subdued GDP growth and wage growth, preventing the BoE from incresing the bank rate over that time horizon.


Source: Macrobond

Disclaimer

Kari Due-Andresen

Chief Economist Norway

Norway and UK

kadu01@handelsbanken.no

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