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UK CommentBoE more hawkish than expected

  1. Policy rate unchanged at 0.5 percent, but minority favouring an imminent rate hike increased to three from two
  2. MPC sees Q1 weakness as merely temporary
  3. Increased likelihood of a rate hike in August
Policy rate unchanged at 0.5 percent, but minority favouring an imminent rate hike increased to three from two
The Monetary Policy Committee (MPC) of the Bank of England (BoE), as expected, decided to keep the policy rate unchanged at 0.5 percent at today’s policy meeting. However, the majority this time shrunk from seven to six out of nine MPC members, as BoE’s chief economist, Andy Haldane, joined the ranks of the usual hawks, Ian McCafferty and Michael Saunders.
MPC sees Q1 weakness as merely temporary
A key assumption in the MPC’s May projections was that the dip in GDP growth in Q1 would prove temporary, with momentum recovering in the second quarter. The MPC’s assessment was that this judgement appeared broadly on track. 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 global GDP growth to bounce back in Q2, broadly in line with its expectations from May. At the same time, it said that there were signs that underlying global growth momentum, while still strong by historical standards, might have slowed slightly. Regarding the domestic economy, the MPC pointed to a number of indicators of household spending and sentiment that had rebounded strongly from what it judged to be erratic weakness in Q1. Employment growth had remained solid, and even though manufacturing output fell markedly in April, the MPC pointed to surveys of business activity having been stable, suggesting that GDP growth in Q2 would be in line with the MPC’s May forecast of 0.4 percent. The MPC expected inflation to accelerate slightly more than projected in May in the near term, reflecting higher dollar oil prices and a weaker sterling exchange rate. Regarding the domestic cost pressure, the MPC noted that the domestic labour market had remained strong, and the MPC judged that there was widespread evidence that slack was largely absorbed. Most indicators of pay growth had trended largely in line with the MPC’s expectations.
Increased likelihood of a rate hike in August
For the majority of members, an increase in the policy rate at this meeting was not required. However, as mentioned, three members favoured an interest rate hike. These members had a higher degree of confidence that the slowdown in Q1 was temporary and would largely be unwound. They felt that the most recent indicators of labour demand and pay settlements indicated some upside risks to the expected pickup in pay growth and unit wage costs. The MPC’s judgement regarding the policy rate was the same as in May. The statement reiterated 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 forecast implied two to three hikes by the end of 2020. In addition to offering its outlook for the policy rate, the MPC had reviewed its guidance for the QE programme. The MPC continued to expect to maintain the stock of purchased assets until the policy rate reached a level “from which it can be cut materially”. According to the statement, this reflected the MPC's preference of using the policy rate as the primary instrument for monetary policy. Given its updated assessment, the MPC now intends not to reduce the stock of purchased assets until the policy rate reaches around 1.5 percent, compared to the previous guidance of around 2 percent. The BoE message today was more hawkish than we expected. This also appears to be the market assessment, as the likelihood of a policy rate hike in August, as indicated by market pricing, increased to 68 percent from 48 percent before the statement. For now, we continue to expect the policy rate to be kept on hold until November. However, we believe that the probability of a rake hike as early as in August has increased given the MPC’s hawkish tilt.

Disclaimer

Kari Due-Andresen

Chief Economist Norway

Norway and UK

kadu01@handelsbanken.no

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