BoE to stay on hold: Risks to EUR/GBP skewed to the upside – Danske Bank

Senior Analyst, Mikael Olai Milhøj at Danske Bank, do not expect Bank of England (BoE) to make any policy changes at its March meeting.

Key Quotes

“We expect BoE to maintain the Bank Rate at 0.25%, while leaving the targets for the stock of government bond purchases (APF) and the stock of corporate bond purchases (CBPS) unchanged at GBP435bn and GBP10bn, respectively. We do not expect any changes to the Term Funding Scheme (TFS) either.”

“We expect BoE to maintain its neutral stance by repeating it can move ‘in either direction’.”

“We still expect the BoE to remain on hold for the next 12 months. While we think it is unlikely the BoE will tighten monetary policy in a time of elevated political uncertainty, we think we need to see substantially slower growth and/or higher unemployment before easing becomes likely again. Also, BoE Governor Mark Carney has said that one of the reasons the UK has been resilient to Brexit uncertainties so far is due to the significant monetary easing from the BoE.”

“Note that the BoE reaction function has changed since the financial crisis: BoE puts more weight on growth/unemployment relative to inflation (see also a speech by former Monetary Policy Committee member Martin Weale here, 18 July 2016). In our view, BoE seems to be more worried about slower growth than too-high inflation if this is only temporary.”

“EUR/GBP has reached our 1-3M target of 0.87 and we are currently reviewing our forecast. We still see risks skewed to the upside for EUR/GBP in the coming months ahead of and after the triggering of Article 50.”