BoE Preview: Monetary policy to remain unchanged again in August

Analysts at Deutsche Bank suggest that their expectation is that UK monetary policy will remain unchanged again in August.

Key Quotes

“The 5-3 vote at the last MPC meeting in June was more hawkish than expected, but the data since has not made the growth/inflation tradeoff more challenging for the BOE. But nor have the data brought much relief to the dilemma either. At least 2 MPC members are likely to be still voting for policy tightening in August.”

“A historical assessment of the Bank’s reaction function, or lambda, suggests that the MPC could soon start tightening policy based on current growth and inflation forecasts. This is consistent with Carney’s Sintra comments that a withdrawal of stimulus may become necessary as the monetary policy trade-off becomes more conventional.”

“We are sceptical, however, based on a more pessimistic view of the outlook for growth and wages, as well as the risk that Brexit continues to pose to the policy outlook. Our baseline view is unchanged – we do not expect the BOE to tighten monetary policy until Brexit related uncertainties have been sufficiently reduced.”

“If we are wrong – and there is a risk the BOE finds a majority for a hike by year-end – we do not believe the economy could sustain a cycle of hikes. There is a good chance it would be “one and done”.”

“Expectations for policy rebalancing should reverse. Following the postelection soul-searching about the wisdom of austerity, Chancellor Hammond has been asserting control over spending signals. There is no appetite to loosen the purse strings in any material way. As such, if austerity needs redress, it would have to come mainly from redistribution, not deficit financing.”

“In terms of market implications, short end sterling rates imply a less than 10% chance of tightening at next week’s meeting, and a slightly less than 50% chance of a hike by year-end. Relative to market pricing, then, the risks are perhaps that the Bank sounds slightly more hawkish than market expectations.”

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