According to analysts from Rabobank, the Bank of England will move to 0.75% in August, “but due to the reinstatement of data dependency into its policy reaction function.”
Key Quotes:
“The Bank of England kept its policy on hold at today’s meeting, as the hawks were outnumbered by the doves by 7 to 2. It was just a couple of weeks ago that we and most in the market strongly believed in a May rate hike, but Carney’s comments and the soft patch in the data had squashed such hopes. The big question that remained for this meeting was whether the hold was a hawkish one.”
“The inflation report and the minutes weren’t particularly hawkish, but Carney was doing his utmost best to sound similar to February in order to support the Bank’s credibility and to keep market expectations of a couple of future rate hikes alive. He only partially succeeded in this objective.”
“Governor Carney didn’t want to pull the rug from under the slope of the money market curve and, hence, the value of sterling. He therefore extensively emphasised the low level of slack in the UK economy – as illustrated by the more than 40-year low in unemployment and the pick-up in average weekly earnings – and played down the importance of the soft patch in the Q1 data. He judged the Q1 slowdown as temporary due to erratic factors and signalled that the MPC now waits for when the momentum is going to be re-established. This could already be as soon as this quarter. We don’t think that the MPC needs to see stellar data: a rebound to trend growth would most likely be sufficient.”
“We would also argue that there is never a perfect time to raise interest rates and expect the MPC to base its policy decisions on how it sees the economy developing in the short-to medium-term. If it is really serious about normalising monetary policy away from emergency levels, they better start sooner than later to keep market expectations alive.”
“We therefore continue to forecast the Bank of England to make their move to 0.75% in August, but due to the reinstatement of data dependency into its policy reaction function, we don’t expect the ride to this hike to be smooth.”
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