BoE: How hawkish? - Rabobank

According to Jane Foley, Senior FX Strategist at Rabobank, while BoE tightening could provide some short-term support for the pound, it could also be a harbinger of a more prolonged period of underperformance by GBP.

Key Quotes

“In recent months the markets have been debating whether the time is right for less stimulus from central banks including the Fed, the ECB, the BoC, the BoE and the Riksbank. Underpinning this speculation has been the strengthening of the global economy and a reduction in excess capacity in many countries.  That said, both wage inflation and demand pull price pressures appear benign across the G10.”

“Although the same can be said of the UK, as a result of last year’s post-referendum drop in the value of the pound, cost push inflation is making its presence clear.  This is now generating symptoms of a slowing growth in the UK.  Despite this, three members of the MPC took the market by surprise in June by voting for an immediate interest rate rise.  While the improvement in the global economy will provide a cushion to the UK economy, a BoE interest rate hike could increase the likelihood of a more marked slowdown in growth.  Thus, while a BoE tightening could provide some short-term support for the pound, it could also be a harbinger of a more prolonged period of underperformance by GBP which in turn could heighten the risk of stagflation. Against this backdrop, we continue to expect steady rates from the BoE to prevail for some time.”