BoE: Will they? Should they? – BMO CM

In view of Jennifer Lee, Senior Economist at BMO Capital Markets the two deeply profound questions are for the Bank of England are: Will they raise rates in August? Should they raise rates in August? If forced to give a yes or no answer, I will say ‘yes’ and ‘no’, in that order, she further adds.

Key Quotes

Reasons behind “yes”: There is only one main reason to think they will raise rates: the public opinion among BoE policymakers. At the prior meeting, 5 voted to stay on hold (Mark Carney, Ben Broadbent, Jon Cunliffe, Gertjan Vlieghe, and Andrew Haldane) and 3 voted to raise rates (Kristin Forbes, Michael Saunders and Ian McCafferty). Forbes’ term on the BoE is now over, but she leaves behind her hawkish legacy. Chief Economist Andrew Haldane has switched sides, indicating that he will likely vote to tighten at the August meeting. So that’s a narrow 4-to-3, leaving newcomer Silvana Tenreyo as the swing vote. Given that it will be her first meeting, she will likely vote with the majority. But what side is the majority? Governor Carney has changed his tune, suggesting just last week that “some removal of monetary stimulus is likely to become necessary”, that the Bank’s tolerance for higher inflation is limited, and that they will do what they can to influence the hit to incomes from higher prices.”

Reasons behind “no”: Um… the economy? The data? Over the past two weeks, June manufacturing, construction and services PMIs fell to their lowest levels in a few months, May industrial production dropped for the 4th time in the past five months, the trade deficit continued to widen despite the weak currency, and consumer confidence, in the words of YouGov and the Centre for Economics and Business Research, showed a post-election “pronounced collapse”. And, a weakened minority government and the Brexit talks are two big negatives. Reports of the loss of skilled EU workers leaving the country, questions around London’s future as a financial hub, and the EU’s Michel Barnier warning that “we must face the facts” do not bode well for the U.K. outlook.”

Bottom Line: We still expect a rate hike in August, given the abrupt change in Governor Carney’s words and the near 50-50 split within the committee. But, it will likely be a one-and-done, just to reverse last year’s emergency cut.”

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