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According to ING analysts, the August inflation report will undoubtedly be an awkward one for the Bank of England and when policymakers sit down to discuss monetary policy this week, there will be less than three months left until Brexit, making it very tricky to craft a set of new forecasts.

Key Quotes

“On the face of it, market pricing – which is now looking at a 50% chance of a rate cut this year – is too flat for policymakers’ liking. The forecasts the Bank published back in May already pointed towards a risk of the economy overheating – a subtle hint that rates may need to rise faster than investors were assuming.”

“The swaps curve (upon which the Bank’s forecasts are based) has flattened even more since May, and this will only amplify the degree of overheating built into the Bank’s new projections. Growth and inflation forecasts at the two/three year horizon may get notched up slightly.”

“This begs the question, will the Bank try and set markets straight, by explicitly pushing back against rate cut speculation?”

“We think it’s unlikely. Don’t forget that the Bank’s forecasts are premised on Brexit going smoothly – something that looks increasingly questionable. And while President Trump has opted against hitting China with fresh tariffs so far, there’s little sign of an imminent resolution to trade tensions either – a clear risk for global growth.”

“We therefore don’t expect the Bank to change its guidance on where interest rates will go next – other than to simply reiterate that “limited” rate hikes may be needed if Brexit goes smoothly. The challenge for policymakers will be to justify the inconsistency between their more hawkish forecasts, and more cautious rhetoric, without stepping into the political arena.”