The Bank of England maintained monetary policy unchanged but two BoE members (Ian McCafferty and Michael Saunders) voted for an immediate rate hike (vote count 7-2 for an unchanged Bank Rate). While Mark Carney has already revealed that the BoE no longer wants to pre-commit to a hike, this was as close to a pre-commitment as we could get.
Looking at the meeting summary and minutes, there were no major shifts in the policy signal from the Bank of England, as economic data have been in line with the projections in the February Inflation Report. The BoE says ‘ongoing tightening of monetary policy’ is needed over the forecast horizon.
While the positive contribution to CPI inflation from GBP depreciation is fading, the BoE thinks domestic cost pressure is increasing, as slack has been more or less absorbed. In order to avoid a more persistent CPI inflation overshoot, it is appropriate to raise rates. The BoE still expects growth to remain above potential GDP growth over the forecast horizon.
With respect to Brexit, the Bank of England did not alter its communication despite the agreement on transition. Based on Mark Carney’s comments at a press conference after the February meeting, the BoE had already pencilled in a high expectation of a Brexit transition agreement so it does not really alter the outlook for the BoE.
We still believe the BoE is heading for a May hike and we also believe another hike in November is likely, which is more than the one BoE hike forecast by consensus. As we argued back in February after the last meeting, the BoE seems to have launched a regular hiking cycle and this meeting has not changed our view. Markets have priced in approximately 42bp hikes this year, so we are more hawkish than both other houses and market pricing.
Although the Brexit transition deal is, other things being equal, positive news, it is in our view not a game-changer for EUR/GBP in the short-run and we forecast 0.87 in 3M. The negotiations on what the future relationship looks like are going to be much more complicated, not least with respect to the Irish border. We still think EUR/GBP will move lower in 6-12M on Brexit clarification and higher UK interest rates. We target EUR/GBP at 0.86 in 6M and 0.84 in 12M.