Bank of England monetary policy: striking a delicate balance

LOcom_AuthorsAM-Salman.png   Salman Ahmed
Chief Investment Strategist

 

LOcom_AuthorsAM-Arnaud.png   Charles St Arnaud
Senior Investment Strategist


As expected, the Monetary Policy Committee (‘MPC’) of the Bank of England increased its policy rate by 25bp to 0.50% by a vote of 7-2 and left the other parameters of monetary policy unchanged. The tone of the Bank of England’s communication was, in our view, relatively balanced, saying that “any future increases in Bank Rate would be expected to be at a gradual pace and to a limited extent”.

Nevertheless, the MPC removal of the line saying "monetary policy could need to be tightened by a somewhat greater extent over the forecast period than current market expectations" seems to have been perceived as dovish by the market, judging by the decline in GBP and in rates. We believe that the change is a direct acknowledgement by the MPC that the market has currently priced in enough hikes and also a way to prevent the market from pricing in a too aggressive increase in rates.

Members of the MPC view that the growth and the inflation outlook in the November Inflation Report was little changed from the one contained in the August edition, but that it is mainly the result of ‘the gently rising path of Bank Rate implied by current market yield’.

Overall, we believe that the MPC statement strikes a delicate balance between keeping the option for further rate hikes open and dissipating the expectation that it is ‘one-and-done’, while preventing financial markets from pricing in an aggressive hike. This would lead to higher rates and a stronger GBP. However, given the risks to the outlook, the BoE is not ready to enter a full cycle of policy normalisation, preferring to adjust rates according to developments on inflation. We believe that the BoE is likely to deliver two rate hikes next year, as we think inflation may prove to be more stubborn than the BoE expects, given the expected continued reduction in excess capacity in the economy.

important information.

This document has been prepared by Lombard Odier Funds (Europe) S.A. and is issued by Lombard Odier Asset Management (Europe) Limited, authorised and regulated by the Financial Conduct Authority (the “FCA”), and entered on the FCA register with registration number 515393. This material is provided for information purposes only and does not constitute an offer or a recommendation to purchase or sell any security or service. It is not intended for distribution, publication, or use in any jurisdiction where such distribution, publication, or use would be unlawful. This material does not contain personalized recommendations or advice and is not intended to substitute any professional advice on investment in financial products. Before entering into any transaction, an investor should consider carefully the suitability of a transaction to his/her particular circumstances and, where necessary, obtain independent professional advice in respect of risks, as well as any legal, regulatory, credit, tax, and accounting consequences. Past performance is no guarantee of current or future returns. This material is the property of LOIM and is addressed to its recipient exclusively for their personal use. It may not be reproduced (in whole or in part), transmitted, modified, or used for any other purpose without the prior written permission of LOIM. This material contains the opinions of LOIM, as at the date of issue.

©2017 LOIM. All rights reserved.