Bank of England steps up hawkish rhetoric

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The Bank of England left policy unchanged but saw some withdrawal of stimulus as appropriate over coming months.

Some hawkish noise was expected from the Bank of England (BoE) after the 13 September meeting given the relative robustness of recent data. But the BoE gave an even stronger signal, saying that a “majority of MPC members judge that […] some withdrawal of monetary stimulus is likely to be appropriate over the coming months in order to return inflation sustainably to target.” This already puts the next BoE meeting on 2 November clearly on the table for a rate hike, as the meeting will also be accompanied by the release of the next quarterly BoE Inflation Report.

Whether such rate hike will actually take place will – next to economic data – clearly depend on political developments over coming weeks. Among them is the Conservative Party Conference from 1–4 October as well as the European Council meeting on 19 and 20 October, where a decision will be taken whether or not to already begin trade talks.

Despite the BoE signaling a rate hike over coming months, again only two out of the nine members of the Monetary Policy Committee (MPC) voted in favor of a rate hike in September already. Chief economist Andrew Haldane remained in the camp of those preferring to leave policy rates unchanged. In our view, a 3:6 vote would have sent an even stronger signal about the next meeting. On the economic side, positive surprises on activity growth and ideally also on wage growth would surely increase chances of a November rate hike.

The latter is not our base case scenario, but if economic data continues to stay strong, a Bank of England rate hike in the first half of 2018 appears quite likely. A very likely intended side effect of the hawkish BoE statement was an appreciation of GBP/USD, which rose 1% after the BoE decision was published. Whether the BoE really follows up on its hawkish tone remains to be seen, but even if it does, we think it will likely amount to a reversal of the August 2016 rate cut and not the full start of a hiking cycle.

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