BoE on hold and keeps neutral stance

As we expected, the Bank of England (BoE) left monetary policy unchanged at its December meeting. It kept the Bank Rate at 0.25%, while it left the targets for the stock of government bond purchases (APF) and the stock of corporate bond purchases (CBPS) at GBP435bn and GBP10bn, respectively. It made no changes to the new Term Funding Scheme (TFS).
The BoE maintained its neutral stance, as it can move ‘in either direction’, which was also as expected. This said, the BoE noted that the effective GBP has appreciated by around 6% since the November meeting, implying a slightly lower inflation path compared with the November Inflation Report. This also means the BoE has less reason to hike.
We expect the BoE to remain on hold for the next 12 months. While we think it is unlikely the BoE will tighten monetary policy in a time of elevated political uncertainty, we think we need to see slower growth and/or higher unemployment before easing becomes likely again.
We think the markets price the BoE too hawkishly, as they price the first full BoE hike around October 2018. More than two hikes are priced in by year-end 2019.
Notice that the BoE reaction function has changed since the financial crisis, so the BoE puts more weight on growth/unemployment relative to inflation (see also a speech by former Monetary Policy Committee member Martin Weale here, 18 July). In our view, the BoE seems to be more worried about slower growth than too-high inflation if this is only temporary.

Danske Research Team Danske Bank A/S

Download the full report

Author

Danske Research Team

Danske Bank A/S

Research is part of Danske Bank Markets and operate as Danske Bank's research department. The department monitors financial markets and economic trends of relevance to Danske Bank Markets and its clients.

EUR/USD hits two-day highs near 1.1820

EUR/USD picks up pace and reaches two-day tops around 1.1820 at the end of the week. The pair’s move higher comes on the back of renewed weakness in the US Dollar amid growing talk that the Fed could deliver an interest rate cut as early as March. On the docket, the flash US Consumer Sentiment improves to 57.3 in February.

GBP/USD reclaims 1.3600 and above

GBP/USD reverses two straight days of losses, surpassing the key 1.3600 yardstick on Friday. Cable’s rebound comes as the Greenback slips away from two-week highs in response to some profit-taking mood and speculation of Fed rate cuts. In addition, hawkish comments from the BoE’s Pill are also collaborating with the quid’s improvement.

Gold climbs further, focus is back to 45,000

Gold regains upside traction and surpasses the $4,900 mark per troy ounce at the end of the week, shifting its attention to the critical $5,000 region. The move reflects a shift in risk sentiment, driving flows back towards traditional safe haven assets and supporting the yellow metal.

Crypto Today: Bitcoin, Ethereum, XRP rebound amid risk-off, $2.6 billion liquidation wave

Bitcoin edges up above $65,000 at the time of writing on Friday, as dust from the recent macro-triggered sell-off settles. The leading altcoin, Ethereum, hovers above $1,900, but resistance at $2,000 caps the upside. Meanwhile, Ripple has recorded the largest intraday jump among the three assets, up over 10% to $1.35.

Three scenarios for Japanese Yen ahead of snap election

The latest polls point to a dominant win for the ruling bloc at the upcoming Japanese snap election. The larger Sanae Takaichi’s mandate, the more investors fear faster implementation of tax cuts and spending plans.

XRP rally extends as modest ETF inflows support recovery

Ripple is accelerating its recovery, trading above $1.36 at the time of writing on Friday, as investors adjust their positions following a turbulent week in the broader crypto market. The remittance token is up over 21% from its intraday low of $1.12.