BoE: Keeping the door open for August – Nomura

The Bank of England acknowledged the recent patch of softer growth and inflation data in latest Inflation Report – and it is for these reasons the MPC did not raise rates, as was widely expected in the run-up to the meeting, explains the research team at Nomura.

Key Quotes

“But neither the Governor’s comments nor the forecasts contained within yesterday’s report were dovish in our view. Rather, Mr Carney’s prepared remarks focused on the likely temporary nature of the slowdown (in large part due to weather-related factors), the resilience of economic growth and the labour market (both employment and wage data), and the Bank’s generally optimistic stance on the Brexit transition deal (and thereby business investment).”

“Moreover, the Bank’s forecasts showed no material revision to expectations for economic growth over the forecast horizon despite weaker near-term prints (demand is still shown outstripping supply towards the end of the projection period), and a still-sizable (almost 40bp) overshoot of inflation vs its target on the assumption that policy is left unchanged.”

“As a result, we continue to see the need for the Bank to raise rates at a 50bp per year run-rate, which we believe is consistent with the MPC’s “gradual” and “limited” mantra – which was repeated today – and the degree of overshoot in inflation based on unchanged interest rates.”

“We think that yesterday’s news, therefore, leaves the door open to a rate rise at the next Inflation Report meeting in August, though as Mr Carney said the data will need to prove itself for the Bank to resume its hiking cycle.”