As UK’s activity indicators have rebounded and the unemployment rate remains below the Bank of England’s 4.25% NAIRU estimate (actually, the single-month unemployment rate is now below 4% on the second decimal place), analysts at Danske Bank believe the Bank of England is set to raise the Bank Rate by 25bp to 0.75% at the upcoming meeting despite inflation being lower than expected.
Key Quotes
“While we still believe the Bank of England is too optimistic on the inflation outlook, it seems that Mark Carney and company are more concerned about overheating the economy. Despite growth on average being lower now than before the Brexit vote, it is still sufficient to absorb the remaining slack, as potential GDP growth has declined as well.”
“Like many other central banks around the world, the Bank of England believes in the Phillips Curve and thinks underlying inflationary pressure is increasing as the labour market continues to tighten.”
“We expect the Bank of England to hike once next year. With respect to the tone of voice, we do not expect big shifts. In our view, the Bank of England is likely to repeat that ‘ongoing tightening of monetary policy over the forecast period would be appropriate’ but that rate hikes ‘are likely to be at a gradual pace and to a limited extent’.”
“Remember the Bank of England made a significant change to its QE guidance at its last meeting, as it said it would not consider reducing the stock of purchased bonds until the Bank Rate reaches 1.5% (previously 2.0%).”
“This is a sign that it thinks the natural rate is low and that it does need to raise the Bank Rate many times before monetary policy is neutral.”
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