Since the referendum the UK economy has been doing rather well and according to the Bank of England little slack is left, notes William De Vijlder, Research Analyst at BNP Paribas.
“Given the expectation of 1.75% UK GDP growth per year over the Bank’s three year forecast horizon and the very limited degree of slack left in the economy, above potential growth will justify raising the policy rate.”
“Under the central bank’s assumption of three 25 basis point rises over the next three years, a small margin of excess demand is likely to emerge by early 2020.”
“This would increase domestic inflationary pressures such that inflation settles at the central bank’s 2% inflation target. Mission accomplished.”
“However, the Bank of England is no hurry though to hike.”
“March inflation was slower than expected so in the end cautiousness prevailed: all members of the Monetary Policy Committee agreed that any future increases in Bank Rate were likely to be at a gradual pace and to a limited extent.”
“And patience prevails as well: 7 members voted to keep the policy rate unchanged, 2 were advocating an increase.”
“Turning to the interest rate outlook, if data come in as the Bank of England expects them to, this would pave the way for a base rate increase in August. The market is pricing in a likelihood of 50% of such a move and we have to go as far out on the curve as February 2019 to have a hike fully priced in.”
“Not only the Bank of England is cautious, markets are as well. This could be related to Brexit uncertainty.”
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