nsucurrent.com March 24, 2018

Goldman Sachs on the Bank of England & Haldanes "dovish tilt"

06 August 2017, 12:49 | Colleen Roy

It looks like being a lazy summer for the Bank of England


The central bank boss said rates are likely to begin to rise as the economic outlook improves. It also downgraded expectations for 2018 from 1.7% to 1.6%.

Commenting on today's interest rate decision and inflation report by the Bank of England's Monetary Policy Committee, Dr Adam Marshall, Director General at the British Chambers of Commerce (BCC), said: "The Bank of England's decision to keep interest rates unchanged is unsurprising, and reflects the more subdued levels of growth we have seen in United Kingdom business communities over recent months".

"The market hadn't priced in much possibility of a hike this month but the 6-2 vote was a bit of a dovish surprise for us", said Yujiro Goto, an analyst at Nomura, one of the only banks that had been calling for a rate hike this month. Meanwhile, the Pound US Dollar exchange rate was trending lower at 1.3158.

The Bank of England has cut its economic growth forecast for this year and next, warning that households will see a fall in their real take-home pay this year and that output growth will remain below its normal expansion rate for some years.

It is unlikely more rate-setters will join dissenters in voting for a hike, although there have been signs of a growing split on the MPC.

In its latest report, the National Institute of Economic and Social Research (NIESR) predicted the Bank would raise rates in the first quarter of next year as the economy starts to recover. "The immediate threat of higher interest rates (which would, in turn, bring sterling strength) has passed, allowing United Kingdom exporters to continue to use their exchange rate-induced price advantage when selling overseas".

That's down from three votes for a rise at the last meeting, with Kristin Forbes, who voted for a rise in June, having left the MPC.

'Monetary policy can not prevent either the necessary real adjustment as the United Kingdom moves towards its new global trading arrangements or the weaker real income growth that is likely to accompany that adjustment over the next few years.

The decision comes a year after rates were cut to 0.25% last August following the Brexit vote.

In its last set of minutes the Bank said that its forecasts were "conditioned on the assumption that the adjustment to the UK's new relationship with the European Union is smooth", but this time it said that the "projections assume that, in the interim, households and companies base their decisions on the expectation of a smooth adjustment".

Fabrice Montagne, chief United Kingdom and senior European economist at Barclays, said: "We expect the Bank of England to downgrade its forecast in order to reflect disappointing data".

Underlying the squeeze on households from inflation, real wages will fall by 0.5 per cent this year, according to BOE's new forecast.

He points out that savers have not only seen little to zero gains on their cash, but also an uptick in inflation, which hit a four-year high of 2.9 per cent in May and is expected to peak to 3 per cent in October.

GBP/USD still sits comfortably above the 1.31 mark, which will grant some reprieve to those looking to sell the pound (the pair sits a solid 10% above the post-referendum lows of 1.20), but the same can't be said for euro buyers - a solid break below 1.10 in GBP/EUR will mark the lowest rate since 2009.

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