BoE: No change for the moment - Natixis

Sylwia Hubar, Research Analyst at Natixis, expects BoE’s Committee to vote by 7 to 1 to maintain status quo at the monetary policy meeting concluding today.

Key Quotes

“Kristin Forbes is set to vote for an imminent rate hike again, but for the last time, as she leaves the BoE’s MPC by the end of the month.”

“The unemployment rate firmly at 4.6% and inflation staying well above the BoE’s target (April: 2.7%) would normally speak for a looming change in the monetary policy stance. Yet, other economic indicators suggest weakening momentum in the economy, most notably: 1/ slowing growth in average earnings, 2/ falls in London property transactions, 3/ slowing household consumption, not to mention the current political uncertainty, which although promising of a softer Brexit, could worsen if UK’s new government ignored to readjust its Brexit strategy.”

“Outlook 

• The BoE is set to tolerate above-target inflation and maintain its accommodative stance unchanged throughout 2017. We expect inflation to increase further and hover somewhat below 3% in coming months. The predicted overshoot is set to largely reflect the ongoing pass-through from the sterling weakness to import prices. This effect will gradually diminish later in the forecast period, while domestic costs pressures will strengthen with unemployment rate reaching its equilibrium rate. Still, in the short run we expect lower investment, less consumption and less support from foreign trade, as economic agents are more cautious and face higher inflation and input costs. The pass-through from currency weakness to inflation (less domestic demand) and slowly dissipating effect of depreciation-induced competitiveness coupled with ongoing uncertainty and business unpredictability (less trade and less incentives to invest) are likely to weigh on productivity and growth in the short run, which warrants BoE’s ongoing accommodative stance. 
• The indecisive general election’s result added to political instability, but also increased prospects of a softer Brexit. Should the upcoming government adopt a softer Brexit stance aimed at a more “sensible” and business-oriented Britain’s exit, domestic cost pressures were likely to recover sooner than later, paving a way for the BoE to start normalizing its policy possibly as soon as next year.”