BoE leave rates unchanged with neutral outlook - ING

James Knightley, Senior Economist at ING, suggests that the markets think the next move will be a rate hike while ING still think a rate cut is more probable in 2017 as far as BoE is concerned.

Key Quotes

“The Bank of England has left Bank Rate unchanged at 0.25% in a 9-0 vote. It has also retained the view that “monetary policy can respond in either direction”. Given the relative resilience of growth, rising inflation and a more positive global environment post the US election, financial markets are pricing in a near 40% chance that the next move in rates will be a hike. We disagree and think a rate cut is more probable.”

“The BoE’s statement suggests that the near term global outlook has improved while domestic activity is growing “at a moderate pace”. However, they are concerned about the outlook with surveys “suggesting some slowing in activity is in prospect during 2017”.”

“The BoE also notes that sterling has posted a modest recovery, which reduces the likely of an inflation overshoot in 2017 and 2018, but they note the sharp increase in inflation expectations amongst households. They will continue to “monitor the evolution of these expectations closely”

“We agree that inflation is a concern since it is likely to rise above 3% in 2017 due to higher import costs and rising energy prices. However, that’s much lower than when CPI peaked above 5% in 2008 and 2011 when commodity prices were soaring and VAT was being increased. The BoE “looked through” price rises then and we suspect it’ll do the same now. UK growth risks will be a higher priority.”

“Brexit-related uncertainty is leading to big falls in business surveys regarding investment and hiring plans. At the same time rising inflation is squeezing household spending power and the slowdown in job creation is adding to uncertainty for consumer spending. This combination of weakness from both the household and corporate sectors poses downside risks to growth next year. This will reduce inflation pressures in the medium term so we still think that a rate cut is more likely than a rate hike.”