According to a Bloomberg survey, majority of the 31 economists surveyed expected BoE Bank Rate to reach 1.25% by the end of 2019. That is, they expected two 25bps rate hikes next year. The first move is expected to come in Q2. It’s cited that Brexit is a concern that slows BoE’s tightening path. But by the time of Q2 next year, such concerned should be cleared. Meanwhile, falling inflation could only give BoE a reason to keep rates on hold until May. With Brexit cleared, and unfolded smoothly, path will be clear for another hike in November. Some analysts also saw BoE’s unanimous votes as sign that policymakers are confident enough to act twice next year. The Bank Rate currently stands at 0.75%.
But it should noted that BoE has revised down the rate path in August Inflation Report released less than three weeks ago. The central bank forecast Bank Rate to hit 0.9% in Q3 2019, revised down from 1.0%. Bank Rate is forecast to be at 1.0% in Q3 2020, revised down from 1.2%.
Looking into the details, the conditioning path that BoE used didn’t price in a 25bps hike fully until 2020. And basically there would be no more hike within the forecast horizon. And based on such conditioning path, CPI is forecast to slow to 2.2% in Q3 2019, 2.1% in 2020. July’s pick up in CPI to 2.5% was in line with BoE’s expectations.
So, to us, a hike in H2 of 2019 is possible based on the current projections and developments. But a hike in Q2 2019 looks a bit stretched. And two hikes in 2019 is rather far-fetched.
Moreover, the unanimous vote was seen to us as a compromise between hawks and doves. That is, BoE was going to hike once this year anyway as Q1 slowdown was proven to be temporary. Let’s do it and settle, but to stay graudual and cautious going forward.
