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UK CommentPreview Bank of England: A close call

  1. BoE surprisingly hawkish in June
  2. New data somewhat on the weak side of BoE expectations
  3. A close call in August
Bank of England surprisingly hawkish in June
The Monetary Policy Committee (MPC) of the Bank of England (BoE) will meet on Thursday, August 2, with its decision due to be released at 13:00 CET. The third Inflation Report of 2018, with updated forecasts and a new assessment by the MPC, will also be published on that day alongside minutes from the monetary policy meeting. At its June meeting, the MPC decided to keep the policy rate unchanged at 0.5 percent. However, the majority voting to keep the policy rate unchanged shrunk from seven to six out of nine MPC members, as the BoE’s chief economist, Andy Haldane, joined the ranks of the usual hawks, Ian McCafferty and Michael Saunders. In June, the MPC judged that the dip in GDP growth in Q1 would prove temporary, with momentum recovering in the second quarter. The MPC noted that downside risks from geopolitical developments had increased, but saw the prospects for global GDP growth as largely remaining strong and judged financial conditions as continuing to be accommodative. The MPC expected inflation to accelerate slightly in the near term, reflecting higher dollar oil prices and a weaker sterling exchange rate. Regarding domestic cost pressure, the MPC noted that the domestic labour market had remained strong and judged that there was widespread evidence that slack was largely absorbed.
New data somewhat on the weak side of BoE expectations
When it comes to the real economy, it looks as if the trend is somewhat on the weak side of the MPC’s expectation. The MPC had expected GDP growth to pick up to 0.4 percent in Q2. While survey data, such as the PMIs, indicate that momentum indeed picked up in Q2, the official ONS estimate for monthly GDP growth was only 0.3 percent in May, up from 0.2 percent in April. The NIESR rolling three-month GDP estimate was 0.2 percent in May, up from zero in April. When it comes to the labour market, the MPC had expected the unemployment rate to fall to 4.1 percent in Q2, but the unemployment rate stayed unchanged at 4.2 percent in the three months to May. The PMI composite employment index fell in May and June, indicating that the labour market could be weakening somewhat after showing surprising strength for a long time. It looks as if wage growth and inflation are also developing somewhat more weakly than the BoE had expected. Wage growth seems to have peaked, with regular pay growth (average weekly pay growth excluding bonus payments) falling to 2.7 percent in the three months to May, from 2.8 percent in April and 2.9 percent in March. The MPC, for its part, had expected regular pay growth to average around 2¾ percent in Q2-Q4 of this year. CPI inflation has also been weaker than expected. In June, headline CPI inflation was 2.4 percent y-o-y for a third consecutive month, while core inflation fell to 1.9 percent, from 2.1 percent in May and April. The BoE had expected CPI headline inflation to increase to 2.5 percent in June, from 2.4 percent in April and May.
A close call in August
The BoE’s message in June was more hawkish than we expected. As mentioned, while the MPC voted to leave the policy rate on hold in June, three members favoured an interest rate rise. The MPC’s assessment in June was that if the economy performed largely as expected, “an ongoing tightening of monetary policy over the forecast period would be appropriate to return inflation sustainably to its target at a conventional horizon”. In May, the conditioning path for the BoE’s forecast implied two to three hikes by the end of 2020. The likelihood of a policy rate rise in August, as indicated by market pricing, is currently around 91 percent. For some time, our official expectation has been that the policy rate will be kept on hold until November this year. However, given the surprisingly hawkish signals from the BoE in June, we believe the likelihood of an August hike has indeed increased. That said, given the weaker-than-expected data released over the past few weeks, we prefer to keep our expectation for the BoE to hold until November, while realising that August will probably be a close call.


Kari Due-Andresen

Chief Economist Norway

Norway and UK

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