State Street Comments on Bank of England Monetary Policy Committee Meeting and Inflation Report

In reaction to the Bank of England (BoE) Monetary Policy Committee (MPC) meeting and publication of its inflation report today, Michael Metcalfe, global head of macro strategy at State Street Global Markets, and Alan Wilson, senior investment manager of active fixed income at State Street Global Advisors offer their views.

Metcalfe commented, “Like the Federal Reserve (Fed), the BoE has chosen to put little weight on the weakness of Q1 GDP data. However, the hawkish tone suggests they are less willing to ignore recent inflation trends and that the committee now has a clear tightening bias.”

“Taking its lead from the much higher inflation observed by State Street PriceStats* – a daily measure of inflation derived from prices posted to public websites by hundreds of online retailers – the trend in official inflation data this year has been stronger than the BoE had originally projected. The BoE’s inflation projections have now been adjusted upward in response. However, unless this stronger inflation trend is compensated by a much weaker growth profile, effectively a repeat of Q1 GDP data this quarter, interest rate markets will need to better price the possibility of an interest rate hike later in the year. This has the potential to provide a considerable boost to sterling.”

Wilson commented, “In line with market expectations, the BoE left interest rates and its asset purchase programme unchanged. Despite growing market speculation that Michael Saunders could have been the second committee member to vote for a rate hike, Kristin Forbes remained the sole dissenter. While Forbes’ influence can be somewhat discounted given her imminent departure, inflation concerns do seem to be rising within the MPC given the hawkish signalling within the meeting minutes and the upward revisions to the near term inflation forecasts within the Quarterly Inflation Report. . Since the UK referendum last year, the BoE has been contending with the conflicting forces of a strong domestic economy, inflationary pressures and its projection a Brexit related slowdown may be coming.”

Given this outlook, the MPC has remained in a neutral position, shifting between dovish and hawkish signalling as it awaits tangible signs the economy is slowing. Recently, MPC signalling has been of a hawkish nature to encourage the market to dampen inflation pressures on its behalf. Nonetheless, this signalling has been completely ignored by the market, with next to no rate hikes priced over the next year. As such, the committee has been forced into action today; given the precarious outlook for the domestic economy, they cannot allow inflation to become entrenched.”