BoE review: A slightly hawkish twist – Nordea Markets

“As widely expected, Bank of England kept its policy rate on hold today. The inflation report contained a more hawkish view on domestic cost pressures, while keeping a defensive stance on growth. Brexit is still the big question mark,” noted Nordea Markets analyst Morten Lund.

Key quotes

“The MPC reiterated their “gradual and limited” rate hike rhetoric, and that the future rate path was conditioned on a relatively smooth Brexit transition to an average of a range of outcomes. A new phrase in the minutes was, however, included, saying that the response to Brexit will not be automatic and could be in either direction.”

“Digging into the statement in the attached inflation report, it was expressed that the response on different Brexit outcomes depends on the effects on demand, supply and the GBP exchange rate – and more importantly that the current state of the three factors differs materially from the situation around the 2016 referendum. In other words, as the starting point of inflation is already above target, the MPC’s flexibility in terms of loosening monetary policy to support its objectives of growth and employment is limited. We interpret this as a slightly hawkish signal.”

“Still, the BoE indicates that a no-deal scenario could lead to a similar dovish response to the one in the aftermath of the 2016 referendum (rate cut and more asset purchases) if the immediate shock to demand were greater than to supply. We believe this will be the case. In addition, Carney has earlier signalled that a no-deal would probably result in a BoE reaction quite similar to the 2016 referendum, despite inflation now being higher. This corresponds to our view of Mark Carney as a pragmatic, not an inflation hawk.”