BoE: Moderate tightening to be delivered during 2018 – Scotiabank

The Bank of England has flagged that a rate hike is likely to be delivered at the next meeting in November and Alan Clarke, Head of European Fixed Income Strategy at Scotiabank suggests that they expect moderate further tightening to be delivered during 2018, helped by accelerating growth and wage inflation in the New Year.

Key Quotes

“The most striking change over the past month has been the change in the Bank of England’s tone. The latest Monetary Policy Committee (MPC) minutes were clearly hawkish and the recent data flow has been upbeat. The combination of both makes a rate hike at the November meeting appear almost certain.”

“Thus far, the MPC has been prepared to tolerate inflation somewhat above target, justified by there being a reasonably wide margin of spare capacity. However, the Bank’s view is that the margin of spare capacity is being eroded more quickly than expected—not least because of the latest downwards surprise in the unemployment rate. The BoE also recently judged that the potential growth rate in the UK has slowed, making it easier for slack to be eroded. Last but not least, near term inflation prints have exceeded BoE expectations and the committee judges that wage inflation is probably more buoyant than the official data imply. Both suggest that inflation will continue to exceed the Bank’s inflation target. The bottom line is that the committee’s tolerance is wearing thin and the first rate hike is imminent.”

“The next consideration is whether this rate move is the first of several, or merely a reversal of last August’s emergency rate cut in the aftermath of the EU referendum result. We suspect that there will be further increases in Bank Rate during 2018, though the data will dictate the timing. Our view is that the MPC will be opportunistic; clawing back interest rate ammunition when the activity data appear strong enough to support such moves. In that context, we doubt that the data will support a second rate hike as soon as the February “Super Thursday” MPC meeting. However, towards the middle of the year we would expect concrete evidence of accelerating wage inflation and an upwards path in GDP growth to pave the way to further increases in Bank Rate.”