Analysts at Rabobank don’t expect the Bank of England to alter its policy settings at the December meeting next Thursday. According to them, the meeting in May offers the best hope of a hike to 1.00%, but this assumes that the UK will be leaving the EU with a deal in place.
Key Quotes:
“If it weren’t for Brexit and all the uncertainty associated with it, the MPC would have seriously contemplated a rate hike at the last November meeting, or at the very least prepared markets for such a hike in February 2019.”
“We do however expect the MPC to support the currency by appearing hawkish, making sure that investors keep the possibility of a future rate hike in the forefront of their minds. There is a very high hurdle for the policy makers to abandon their current guidance of gradually rising interest rates, so we expect them to stick closely to it.”
“If the current deal does make its way through Parliament and if there will be a transition phase that potentially extends into 2022, the MPC will have a clear way to raise Bank rate to 1.00% in May. A relatively benign Brexit, or even a revocation of Article 50, may release quite some pent-up demand and this could then urge the MPC to speed up the pace of the current hiking cycle.”
“The MPC is being dealt a very difficult hand should the UK indeed crash out of the European Union. Even with inflation rising to uncomfortable levels, soft demand conditions and rising political pressure will undoubtedly turn the first post-Brexit hike into a very controversial one. It may take the MPC longer than just a month to lay the groundwork for such a move.”
“We don’t expect another round of monetary policy easing either. For one, that train has already left the station given the tightening bias of the other central banks. Secondly, we don’t expect the MPC to be very keen on picking up the politicians’ pieces (once again). Instead, we think that the BoE policy would better serve the UK economy by protecting the value of its currency, and, hence, keeping inflationary pressures as contained as possible.”
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