Bank of England Holds Rates and Stays on Message, Analysts Give their Views

Analysts give their views on the Bank of England's latest interest rate decision and monetary policy statement. 

The Bank of England held its main interest rate at 0.50% in December, a unanimous decision by the Monetary Policy Committee that was widely expected by the market.

Thursday’s decision comes after BoE staff fired the starting gun on a “slow and gradual” hiking cycle back in November, with the first interest rate rise for a decade, which took the bank rate up by 25 basis points to 0.50%.

The November move was designed to combat rising inflation. Rate setters noted Thursday the November increase in inflation, which took the consumer price index above 3% for the first time since April 2012.

However, they reiterated the Bank’s conviction that its current monetary policy stance is appropriate to return inflation steadily toward its 2% target over coming years. The BoE also had words to offer on recent progress in the Brexit negotiations.

“Developments regarding the United Kingdom’s withdrawal from the European Union – and in particular the reaction of households, businesses and asset prices to them – remain the most significant influence on, and source of uncertainty about, the economic outlook.”

“The Committee noted the progress in the Article 50 negotiations between the United Kingdom and the European Union.”

“In such exceptional circumstances, the MPC’s remit specifies that the Committee must balance any trade-off between the speed at which it intends to return inflation sustainably to the target and the support that monetary policy provides to jobs and activity.”

The Pound pared part of its earlier gain over the dollar and Euro in response, suggesting the announcement did little to lift expectations of further interest rate rises to come.

Sterling was quoted 0.10% higher at 1.3420 against the Dollar after the statement, while the Pound-to-Euro rate was marked 0.14% higher at 1.1344.

Since the BoE’s November rate rise, markets have bet on a further two interest rate hikes before the end of 2020, although there is considerable divergence among economists and strategists over whether this puts expectations too high or low.

(Updating below....)

Above: Pound-to-Dollar rate shown at hourly intervals.

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Analyst Views:

Neil Jones, Head of Corporates, Mizuho Bank

“Sterling is lower on dovish minutes. The One & Done theme remains in play.”

“To add clarity here: The latest minutes endorse the view that last month’s BoE hike is a one off for now. Removing the Brexit cut - the Dots are not coming in any time soon.”

Kallum Pickering, senior UK economist, Berenberg

"The MPC signalled that while it plans to tighten monetary policy further, it is not yet ready to begin the process of preparing markets for the next hike just yet."

"This sits well with our call that the next hike will not come until the second quarter of 2018, some six months away."

"Expect stronger guidance on the path of rate hikes at the February 2018 Inflation Report when the BoE will also updates its economic forecasts."

"We look for two hikes in 2018, one in Q2 and one in Q4, followed by one in Q3 2019. Even with a modest continued tightening in which the Bank Rate increased to 1.25% by the end of 2019."

Paul Hollingsworth, senior UK economist, Capital Economics

"While the committee appears satisfied with the impact of the first hike, noting that it was in line with expectations, there was little new information on when the next hike might come – other than that further “modest” rises would be needed over the coming years if the MPC’s economic projections prove correct."

"Note that the next hike in Bank Rate is fully priced in for around the turn of 2019, little changed from November’s MPC meeting."

Nikesh Sawjani, UK economist, Lloyds Banking Group

"Assuming that the economic data in the run up to the next meeting remains broadly in line with expectations, the February meeting could see a shift forward in market expectations over the next interest rate hike, from Q1 2019, closer to our own view of Q3 2018."

Daniel Vernazza Ph.D, economist, UniCredit Bank

"We have not changed our view that the MPC is unlikely to hike again in 2018 as economic activity is slowing, headline inflation has likely peaked, domestically-generated inflation remains weak, and a resolution of Brexit-related uncertainty is unlikely before spring 2019."

Vatsala Datta, UK Rates strategist, RBC Capital Markets

"We continue to think that Gilts will remain supported on cross-market, particularly against USTs, over the course of next year, given the cautious BoE stance, and we continue to see further tightening in the 10yr UK-US yield spread."

"The short-end looks fairly priced at these levels, suggesting two rate hikes over the policy horizon, firmly in line with the Bank’s guidance. However, we think that the market is underpricing term premia in the maturity area and thus we expect a steeper money market curve."

James Rossiter, FX strategist, TD Securities

"With the MPC holding both its policy settings and the messaging around them steady in December, sterling is left without a strong directional push into year-end."

"This leaves GBP subject to the ongoing cross currents of macro developments and Brexit headlines."

"Over the next several weeks, market attention may focus on the latter, particularly as the European Leaders Summit gets underway in Brussels this week."

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Earlier Predictions: 

Robert Wood, UK economist, Bank of America Merrill Lynch

“We do not expect the BoE to make a big deal of "sufficient progress" yet: we expect them to say they will watch the confidence data closely and update their assumptions in the February Quarterly Inflation Report.”

“Their forecasts assumed a "smooth adjustment" to new post-Brexit trading terms, so progress in itself does not have automatic implications for their projections.”

“GBP has remained relatively resilient following the November QIR, effectively shrugging aside the "one and done" narrative. We put this down to the emphasis that the market continues to place on the Brexit negotiation as the key variable in shaping UK rate expectations.“

Jacqui Douglas, chief European macro strategist, TD Securities

“After hiking rates last month and clearly communicating an “on-hold” policy stance, there’s very little need for the MPC to say much at all at this meeting (see our preview).”

“What very little data we’ve had has shown that the economy has moved broadly in line with recent quarters near its trend rate of growth and inflation is roughly in line with the BoE’s projection.”

“An unchanged outcome on all fronts suggests little reaction in GBP as investors focus attention on risk events elsewhere. Both the Fed and ECB are likely to have a greater directional pull this time than the BoE in our base case.”

“If realized, our (slightly) hawkish risk case could see GBP edge toward 1.3520 against the USD and 0.8735 vs. EUR.”

Boris Schlossberg, managing director of FX strategy, BK Asset Management

Traders are looking for any reaction from UK monetary officials to the recent progress in Brexit negotiations and should the tone of the statement improve sterling could quickly pop to the 1.3500 level.

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