Global Daily – BoE not minded to raise rates too much further

by: Nick Kounis , Georgette Boele

BoE View: Rate hike coupled with dovish communication – The BoE increased its Bank Rate by 25bp to 0.5% as was widely expected. Although there was a clear majority in the MPC for the decision (7-2), the committee stressed that further monetary tightening would be relatively slow and modest. Indeed the statement noted that ‘all members agree that any future increases in Bank Rate would be expected to be at a gradual pace and to a limited extent’. It also omitted the communication it set out previously that it would raise interest rates by more than financial markets were currently expecting. The MPC said it expected inflation to ‘fall back over the next year and, conditioned on the gently rising path of Bank Rate implied by current market yields, to approach the 2% target by the end of the forecast period’. Its projections were based on the assumption that Bank Rate would rise to 0.7% next year (so just under one rate hike). Given this forward guidance, financial markets scaled back their expectations for interest rate hikes going forward, which supported gilts, but weighed on sterling. 10y gilt yields were down by 8bp. EUR/GBP moved back above 0.89 while GBP/USD to the low 1.31s.

171102-Global-Daily.pdf (33 KB)

Our base case is that the BoE will leave interest rates on hold in the coming months. Economic growth will likely remain moderate, with the risks tilted to the downside because of the uncertainty related to the shape of the eventual Brexit. In addition, inflation should come down as the impact of the depreciation sterling should wane. Given this macro and BoE outlook, we expect sterling to soften further. It is likely that EUR/GBP will again rise towards 0.90 in the coming weeks. Moreover, sterling will probably weaken versus the US dollar as well. GBP/USD could drop towards 1.30 in the near-term. (Nick Kounis & Georgette Boele)