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UK CommentBoE to leave policy unchanged at its June meeting

  1. The majority of MPC members will probably want to wait and see
  2. Data have been mixed
  3. Market will watch for signals regarding August; we do not expect a rate hike until November
The majority of MPC members will probably want to wait and see
The Monetary Policy Committee (MPC) of the Bank of England (BoE) will meet Thursday next week, with its decision due to be released at 13:00 CET. Minutes from the monetary policy meeting will also be released. At its meeting in May, the MPC decided to keep the bank rate unchanged; it was a split decision (7 to 2). Despite the minority still wanting to raise the bank rate, the MPC struck a less hawkish tone in May than in February. In May, the MPC just said that if the economy were to develop broadly in line with expectations, an ongoing tightening of monetary policy over the forecast period would be appropriate. However, the MPC also said that there was particular uncertainty around the near-term outlook given the weakness in Q1, both in the UK and abroad. The conditioning path for the Bank of England forecast implies that the bank rate will be lifted two to three times by the end of Q1 2021. Since the May meeting, data have been mixed. We expect the majority of the MPC to want to wait and see whether the Q1 weakness was only temporary.
Data have been mixed
Labour market numbers so far appear to be well enough in line with the BoE’s near-term expectations. The unemployment rate in the three-month period to April stayed flat at 4.2 percent, while the BoE had expected it to fall to 4.1 percent. Regular pay fell to 2.8 percent in the three-month period to April from 2.9 percent in the three-month period to March. The Bank of England (BoE), in its May Inflation Report, expected regular pay growth to average around 2 ¾ in the period 2018 Q2-Q4. Consumer price inflation stayed flat at 2.4 percent y-o-y from April to May after falling from 2.5 percent in March. The trend has matched the BoE’s expectations. When it comes to economic growth, sentiment suggests that the rebound in Q2 will be quite modest with quarterly growth picking up to around 0.3-0.4 percent. The Bank of England has expected 0.4 percent. Monthly activity data have been mixed, with industrial production being much weaker than expected. Retail sales, on the other hand, have surprised to the upside, posting strong gains in April and May, but some of the recent strength has been due to one-off effects.
Market will watch for signals regarding August; we do not expect a rate hike until November
Market pricing currently indicates a probability of around 50 percent that the bank rate will be lifted in August and 66 percent that it will be raised in November. By the end of 2020, almost three rate hikes are expected by the market. We expect no change to monetary policy at this week’s meeting, but it will be interesting to see how the BoE describes the economic outlook and if it further encourages market expectations of a rate hike in August. Our expectation is that the Bank of England will hold its fire until November.

Disclaimer

Kari Due-Andresen

Chief Economist Norway

Norway and UK

kadu01@handelsbanken.no

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