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The Monetary Policy Committee of the Bank of England decided today to keep rates unchanged at 0.75% as expected. Analysts at Rabobank point out that there was some risk of a hawkish dissent, but this eventually didn’t materialise. They noted that the BoE really wants the market to believe that it is serious about raising interest rates in the future

Key Quotes:  

“As expected, the Bank of England MPC kept rates unchanged at 0.75%. There was some risk that the most hawkish MPC member, Michael Saunders, would vote for a rate hike towards 1.00% to signal that the MPC’s policymaking abilities weren’t limited by Brexit uncertainties, but this eventually didn’t materialise.”

“But there was no clear signal that the MPC wants to hike interest rates in 2019. On the contrary, the MPC sees the economy operating with some spare capacity this year. Our interpretation is that the next rate hike is some way off, which is in line with our forecasts.”

“The market-implied probability of a rate hike before year-end has dropped to below 30%, while investors don’t really seem to buy into the Bank’s forecasts further out either.”

“But actual measures of domestically generated inflation remain modest and below their historical average. The MPC’s outlook is therefore much more model- than data-dependent. But given the huge uncertainties that the economy faces over Brexit -or perhaps a US recession in 2020- the market isn’t attaching too much value to the Bank’s predictions. While a 2019 rate hike seems to be taken off the table now the MPC explicitly sees “a small margin of excess supply”, the guidance of a few Bank rate hikes in 2020 and 2021 depends entirely on a clouded outlook”.