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Senior Economist comments on rates and the BoE growth forecast

Senior Economist, Silvia Dall'Angelo comments on rates and the BoE growth forecast:

The Bank of England was on hold today, as largely expected, and the MPC unanimously voted to keep policies unchanged. However, the BoE maintained its mild tightening bias, and its updated forecasts suggested that the BoE deems market’s expectations of one rate hike over the next three years as too complacent.

It does make sense for the BoE’s ‘wait-and-see’ approach for the time being, which echoes the Fed’s recent mantra – for different reasons. Despite the six-month extension to the Brexit deadline, the fog of Brexit is as thick as ever. The extension has removed the short-term risk of a no-deal outcome, but uncertainty has lingered and, crucially, there is no clarity on the end-game. In addition, downside risks from external developments and brewing trade tensions have diminished, but they have not disappeared.

That said, the BoE is keeping its options open and has maintained the flexibility to hike rates if the opportunity arises. Updated forecasts show an upgrade to the BoE’s growth outlook, reflecting the recent strength of data and a more supportive external backdrop. That implies that new forecasts are showing a higher degree of excess demand at the end of the BoE’s three-year forecasting horizon than forecast in February. Accordingly, medium-term inflation forecasts remained slightly above the 2% target, unequivocally suggesting that the BoE has retained a tightening bias.

However, it is unclear whether evolving conditions will offer the BoE a window of opportunity to hike rates sometime over the next year, amid moving Brexit deadlines, domestic and external challenges.

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