Analysts at Danske Bank, expect the Bank of England to continue hiking the key interest rate once a year with the next hike in May.
Key Quotes:
“We had also looked forward to the BoE’s estimate of the natural rate of interest (the rate where monetary policy is neither expansionary nor contractionary). Unfortunately, we did not get much useful information here. We now know that the Bank of England expects it to rise to between 2-3% (nominal) in the long term but that it is lower in the short term, without saying how much lower.”
“As the BoE has stated it will not start shrinking its balance sheet before the Bank Rate hits 1.5%, we guess it is around that level. Hence the Bank of England can hike around three times from the current level of 0.75% before monetary policy becomes neutral. This fits well with our view that the Bank of England will continue to hike around once a year. This of course also depends on the Brexit outcome where our base case (and the Bank of England’s) is still an orderly Brexit. Our base case is that the next hike will come in May. Also keep in mind that the Bank of England seems biased towards postponing a rate hike (as in May) if necessary, as it seems to think the costs of postponing a hike are smaller than hiking prematurely.”
“The Bank of England still thinks GDP growth will stay around 1.7%, slightly above potential GDP growth of 1.5%. As GDP growth exceeds potential, the BoE expects the unemployment rate to fall further and the projection has been revised down compared to the May report. This, in combination with the weaker GBP, has pushed up the inflation projection. We still think the BoE may be too optimistic on the inflation outlook, as we believe the impact of the GBP depreciation will fade faster than the BoE projects and that wage growth will not increase as much as BoE thinks either.”
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