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UK CommentA more hawkish tone from the Bank of England

  1. Policy rate unchanged at 0.5% and QE programme also unchanged. Decision was unanimous
  2. Forecast for real economy revised up
  3. MPC expects policy tightening sooner and to a greater extent
Policy rate unchanged at 0.5% and QE programme also unchanged. Decision was unanimous
As widely expected, the Monetary Policy Committee (MPC) of The Bank of England (BoE) today decided to keep the bank rate unchanged at 0.5 percent and the QE programme was also left unchanged. The decisions were unanimous. However, the MPC struck a notably more hawkish tone today than in November. In November the BoE hiked the policy rate by 25 basis points, but cautioned that there were “considerable risks to the outlook... related to the process of EU withdrawal” and that Brexit related uncertainties appeared to be “reinforcing the market slowdown”. Today the tone was more upbeat. Most of the cautionary language was dropped, and the MPC simply noted that Brexit remained the most significant source of uncertainty. In November, the MPC also debated the prospects for inflation, with two MPC members opposing the rate hike as they felt there was insufficient evidence that wage growth would pick up in line with projections. Today, however, the MPC had become more confident and noted that “...the firming of shorter-term measures of wage growth in recent quarters, and a range of survey indicators that suggests pay growth will rise further in response to the tightening labour market, give increasing confidence that growth in wages and unit labour costs will pick up to target-consistent rates.”
Forecast for real economy revised up
Since November, market interest rates have increased, resulting in a conditioning path for the BoE forecasts that was some 0.15 basis points higher. However, despite the higher conditioning path, the BoE’s forecast for the real economy was slightly lifted compared to November. In particular, the MPC noted that the broad based pickup in global growth had strengthened further and that the current pace of global growth was stronger than projected in November. Also, the MPC saw the risks around the outlook for global growth as tilted to the upside. A lessening drag from the fiscal consolidation following the measures announced in the November Budget would also contribute to a slightly stronger near-term outlook than in November. The MPC judged that there was only a very limited degree of spare capacity remaining in the UK economy. The expectation for GDP growth was lifted by 0.2 p.p. to 1.8 percent in 2018, but left unchanged at 1.7 percent for 2019 and 2020 (modal projections). The unemployment rate forecast was lowered by 0.1 p.p. in Q1 2020 to 4.1 percent, but at the same time the MPC lowered its estimate for the neutral unemployment rate to 4¼ percent from 4 ½ percent a year ago. The CPI forecast for Q1 2018 was lifted by 0.3 p.p. to 2.9 percent, but left unchanged for 2019 and 2020.
MPC expects policy tightening sooner and to a greater extent
To sum up, the message from the BoE today was more hawkish than in November and the MPC now seems more confident in the outlook than we had expected. According to the minutes from the meeting, the MPC now expects a greater degree of excess demand over the forecast period, and given that inflation is expected to remain above target, that further has diminished the trade-off that the MPC is required to balance. The MPC now says that if the economy develops broadly in line with expectations, “monetary policy would need to be tightened somewhat earlier and by a somewhat greater extent over the forecast period than anticipated at the time of the November Report”. The Sterling strengthened on today’s message from the BoE, and the market now prices a probability of just above 70 percent that the bank rate will be lifted as early as May this year. In our current forecast we have expected the bank rate to stay unchanged at 0.5 percent over the next two years due to a hard Brexit taking its toll on the UK economy. We see no reason to change our expectation for a hard Brexit. However, it seems that momentum in the UK economy is currently somewhat stronger than we expected. We will reassess our forecasts for the policy rate and the GBP and release our updated forecasts at our earliest convenience.


Kari Due-Andresen

Chief Economist Norway

Norway and UK

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