BoE: No change expected until 2019 despite hawkish surprise - Danske Bank

Today the Bank of England kept, as expected, interest rates unchanged with a surprise vote of 5 - 3. Analysts from Danske Bank, despite the hawkish tone, expect the BoE to remain on hold during 2017 and 2018. 

Key Quotes: 

“Against expectations, the Bank of England (BoE) made another hawkish surprise, as three members voted for an immediate hike and it removed its neutral stance by no longer saying that it can ‘move in either direction’. There are two reasons for this despite slower growth: 1) inflation has moved higher than the BoE projected in May and 2) the unemployment rate has moved lower than the BoE projected in May. Note that Kristin Forbes (hawk) is leaving the BoE on 30 June, which leaves Ian McCafferty and Michael Saunders as the two remaining hawks.”

“Markets were caught by surprise so UK yields moved higher and GBP strengthened due to the overall more hawkish message. Both we and markets had expected a more soft tone, as Q1 GDP growth was revised down to 0.2% from 0.3% (and not up to 0.4% as the BoE had expected) and economic indicators for Q2 have remained weak (although better in Q1).”

“Despite the overall more hawkish message, we do not expect a BoE rate hike before sometime in 2019. UK growth is slowing, high inflation is temporary due to the weak GBP caused by Brexit, wage growth is weak and does not indicate high underlying inflationary pressure and political uncertainty is high. Also we do not think one should over-interpret the removal of the ‘move in either direction’, as the likelihood of further easing was slim already.”

“While we have a hawkish wing in the Monetary Policy Committee, the core of the committee (including BoE governor Carney) is still dovish.”