Our forecast assumes another BoE hike early next year - RBC
|"The Bank of England raised rates in August for the second time in the past year, lifting Bank Rate to its highest level since 2009," analysts at Royal Bank of Canada Economic Research team point out.
Key quotes
"The move was fully anticipated though the MPC’s unanimous vote was stronger than markets expected (last November’s hike saw two dissents). In their decision, policymakers noted recent economic data were in line with their forecasts from May. In particular, monthly GDP growth showed economic activity picked up in Q2, seeming to confirm the view that weakness earlier this year was largely weather-related. Labour market data have also been supportive—job growth was robust in the three months to May and the unemployment rate remains at a 40-year low, pointing to limited economic slack."
"Wage growth is running slightly slower than expected at this point in the cycle but the BoE seemed to put more weight on their survey of businesses that has indicated rising wage pressures. The central bank continued to signal that limited and gradual tightening will be needed over the coming years to keep inflation on target."
"The outlook for further rate increases rests on the central bank’s assumption for a ‘smooth’ outcome in Brexit negotiations. That is looking increasingly optimistic heading into what could be the final round of talks between the UK and EU. Even if an agreement between the two sides can be reached, it’s not clear UK parliament would ratify the deal given dissent within PM May’s own party to her soft Brexit approach. BoE Governor Carney noted in August that the likelihood of a ‘no deal’ Brexit scenario is “uncomfortably high.” We think how negotiations evolve in the coming months will be key to when (or if) the BoE next raises rates. For now our forecast assumes another hike early next year."
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