BoE: MPC are still in a difficult position - Rabobank

Analysts at Rabobank explained that the Bank of England was successful last week in impressing on the market that there is a clear risk of policy tightening in the coming months. 

Key Quotes:

"That said, the MPC are still in a difficult position.  For several months prior to last week the market had chosen to believe that the Bank would be reluctant to tighten the screws on consumers who were already feeling the impact of falling real wages.  

This factor is still likely to constrain the amount of rate hikes that the BoE will announce over the coming years.  That said, CPI inflation rose to 2.9% in August and, while this is largely a function of higher import prices, signs of second round inflation effects are now emerging.  We are coming around to the view that the BoE may be prepared to hike interest rates once either in November 2017 or February 2018 and then sit back for a while digesting the impact on GBP and on consumption in particular.  

Not only should a policy move consolidate the support provided to the pound by the Bank’s hawkish rhetoric, but it would also protect the central bank’s credibility.  Following so much hawkish talk, the Bank will be expected to put its money where its mouth is in the coming months to prevent a resurgence of criticism along the lines that it is behaving as “an unreliable boyfriend”.  

While we revised up our GBP forecasts modestly to match our less dovish call on the BoE, we continue to expect GBP to lose ground vs. the EUR medium term due to political uncertainty and sluggish UK economic growth relative to the Eurozone."