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State Street Comments On Bank of England Monetary Policy Decision

In reaction to today’s Bank of England (BoE) Monetary Policy Committee (MPC) meeting, Timothy Graf, head of macro strategy for EMEA at State Street Global Markets; and Alan Wilson, active fixed income portfolio manager at State Street Global Advisors, EMEA offer their views.

Graf comments, “Though they aren’t likely to say so explicitly, the messaging around today’s rate hike suggests it could be one and done for the BoE. Conscious that potential UK growth is likely lower as a result of Brexit, persistently above-target inflation is their justification for today’s move. However, once the effects of sterling depreciation pass out of inflation calculations, the still-weak growth and output profile offer little support for a more prolonged tightening cycle. Before today, market pricing for rate hikes over the next two years by the MPC equalled that for the Federal Reserve. The logic behind these expectations is sure to be tested and we believe sterling weakness in response to this dovish hike is more than justified .”

Wilson comments, “In line with market expectations, the MPC made good on its recent hawkish signalling by voting 7-2 to raise the bank rate to 0.5 percent for the first time in over a decade. Despite today’s policy tightening, the accompanying BoE messaging suggests today’s hike was a one-and-done move; the MPC seem to be cognisant of the upcoming headwinds facing the UK over the coming year.

“That said, from today’s release it is clear the MPC has run out of patience over the near term horizon – the economy has performed in line with BoE forecasts, at the same time domestic inflation has accelerated to a five year high, while the labour market has tightened below the committee’s non-accelerating inflation rate of unemployment (NAIRU) estimate. Nonetheless, questions remain over today’s policy announcement; survey data suggests the domestic economy is losing momentum, while inflation is set to peak as the effects of last year’s sterling depreciation fade. 

“In our view, tightening monetary may be premature amid an uncertain growth backdrop and transitory inflation pressure. As such, the BoE may need to move back onto a dovish footing as the realities of Brexit-driven growth slowdown come to pass and as a result, inflation is dragged back toward the MPC target.”