“While the Fed’s expected rate cut on Wednesday is the main focus for markets this week, the Bank of England’s policy decision on Thursday is also drawing attention given the increased fears in markets of a no-deal Brexit, and following some dovish remarks by typically hawkish MPC members last week,” notes ABN AMRO senior economic Bill Diviney.
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“For instance, prominent hawk Michael Saunders said last Tuesday ‘the economy right now is clearly not overheating “” the underlying pace of growth “¦ is weak and below trend’. We and the consensus look for policy to remain on hold at this Thursday’s meeting, but looking further ahead the risk is undoubtedly tilted towards an easing of policy given the weakening in growth momentum and the significant risks to the outlook.”
“With that said, the case for an easing of policy is not quite as clear cut as it is in the US. First, inflation is currently at the Bank of England’s target of 2.0%, wage growth recently accelerated to a 11 year high of 3.6% yoy, and inflation expectations are elevated. Second, while the BoE has hiked rates twice by 25bp, the current Bank Rate of 0.75% remains firmly in accommodative territory – well below the estimated neutral interest rate (c.3.4%, according to the latest Holston, Laubach & Williams estimate).”
“This is in contrast to the US, where the starting point for the effective fed funds rate is at neutral (2.40%). Finally, the recent c.7% depreciation of sterling will already provide stimulus to the economy, as well as add to inflationary pressure. As such, while an easing of policy is likely in the event of a no-deal Brexit – and the economic downturn that it would likely result in – we expect the MPC to remain in ‘wait and see’ mode for the time being.”
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