Bank of England: the signal is neutral, more dovish than market expectations - Danske Bank

According to analysts from Danske Bank, the Bank of England kept its flexibility on further rate hikes next year. They believe that the central bank will stay on hold next year. 

Key Quotes: 

“As expected, the Bank of England (BoE) raised the Bank Rate by 25bp from 0.25% to 0.50% with the vote count 7-2 (Sir David Ramsden and Sir Jon Cunliffe dissented) in line with our expectation but against the consensus view of a 6-3 vote count. It is likely this explains why EUR/GBP moved lower initially. However, UK yields declined 6-9bp across the 2-10Y curve and EUR/GBP ended higher, as the Bank of England did not comment on current market pricing (two hikes over three years, this is also what the BoE’s projections are based on), meaning the BoE keeps its flexibility. In addition, the BoE said it will ‘monitor closely’ incoming data ‘including the impact of today’s increase in Bank Rate’.

“During the press conference, Mark Carney said the rate hike is just a ‘small adjustment’ and that the BoE has ‘stretched the horizon of which CPI inflation should return to 2% target due to unusual circumstances’ (Brexit). Still, Carney noted that inflation is expected to remain slightly above 2% even assuming the two hikes over three years currently priced in the market.”

“Overall, the signal is neutral, which was more dovish than the market had expected, in line with our expectation. Another important thing is that the BoE says that potential growth is 1.5% y/y, so as long as GDP grows by above 0.3% q/q, then the economy will continue running hotter.”

“We still believe the BoE will stay on hold next year and not hike again before 2019, so this is more about taking back the emergency cut from August 2016 just after the Brexit vote. We think it is likely the BoE is too optimistic on wage growth and we believe the BoE does not want to tighten monetary policy too much relative to the ECB.”