BoE signals rate hike | Generali Investments

• The Bank of England (BoE) kept Bank Rate by a 7-2 vote on hold today.
• However, the Monetary Policy Committee (MPC) signaled a rate hike in the „coming months“.
• Policy makers showed less tolerance for above-target inflation given that they judge the economy slightly stronger than anticipated.

As expected, the Bank of England’s Monetary Policy Committee left its key rate unchanged at 0.25% by avoting majority of 7-2, unchanged from the previous meeting. They also decided to keep their (fulfilled) asset purchase targets constant. However, regarding the outlook, the BoE surprised with a relatively clear signal, that they intend to raise interest rates within the next few month. The MPC stated that “a majority of MPC members judge that, if the economy continues to follow a path consistent with the prospect of a continued erosion of slack and a gradual rise in underlying inflationary pressure then [...] some withdrawal of monetary stimulus is likely to be appropriate over the coming months [...]”. Moreover, the committee also stated that the rate hikes would come at a “gradual pace and to a limited extent”.

These surprised markets on the upside as e.g. a Reuters BoE poll saw Bank Rate as flat throughout the forecast horizon (compare graph below). BoE Governor Mark Carney had already hinted at an increase at the ECB’s Sintra forum at the end of June 2017, resulting in temporarily rising UK money market rates.However, subsequently, short-term rates receded again amid the background of so far relatively “unproductive” Brexit negotiations. The latter also contributed to the continued depreciation of the British pound against (not only) the euro. In turn, this helped

 
The BoE is bound by a dilemma between supporting growth amid the Brexit decision and fight off imported inflation due to the depreciation of the pound. With regard to the business cycle, the MPC judged the economy to show “a slightly stronger picture than anticipated”. However, it also emphasizes “considerable risks to the outlook, which include the response of households, businesses and financial markets to developments related to the process of EU withdrawal”. Moreover, regarding other central banks, the ECBis expected to announce its tapering stance in October. Thus, the BoE might also fear that the prospects for monetary policy might differ too much, going forward, which could lead to a further depreciation of the pound and consequently more imported inflation. In sum, within the judgment of supporting growth and fending off inflation, the BoE now seems to lean more towards the inflation side. Accordingly, the British pound appreciated markedly after the BoE meeting by about 1.1% to around 0.89against the euro.

Accordingly, the British pound appreciated markedly after the BoE meeting by about 1.1% to around 0.89against the euro.