BoE introduces two way risk - ING

The Bank has left policy unchanged. The strong run of data has reduced the need for further easing and instead the BoE said  "policy can respond in either direction". James Knightley, Senior Economist at ING said that this statement seems designed to offer the BoE flexibility to respond to the news flow and in this regard, they think that the case for further easing will return.

Key Quotes

“The Bank of England has left monetary policy unchanged in a 9-0 vote on both Bank rate and QE. The recent strong run of activity data, coupled with the sterling induced pick-up in inflation meant that there isn’t the need for action, while the sharp rise in household inflation expectations has contributed to a more balanced assessment on policy.”

“Indeed, the sentence from the previous MPC statement that a "majority of members expect to support a further cut in Bank Rate to its effective lower bound at one of the MPC’s forthcoming meetings during the course of this year” has been removed. The BoE instead now thinks that policy “can respond in either direction”.”

“The Bank has raised its growth forecasts in the near-term (2017 = 1.4% versus 0.8% previously), but lowered them in the later period of the forecast range (2018 is now 1.5% versus 1.8% previously), which reflects “the impact of lower real income growth on household spending” plus uncertainty over the UK’s future trading relationship with the EU.”

“Inflation predictions have been increased markedly due to the sharp fall in sterling and its pass through into consumer prices. Here the BoE acknowledge that while they are prepared to look through higher inflation given the risks to activity, “there are limits to the extent to which above target inflation can be tolerated”.”

“This statement seems designed to offer the BoE flexibility to respond to the news flow and in this regard we think that the case for further easing will return. Business expansion plans have been reined back according to surveys from the Bank of England and Deloitte, which implies weaker investment spending and worker hiring. Government investment projects (expected to be announced on November 23rd) are unlikely to come through quickly enough to offset this. The triggering of Article 50 in March will likely lead to a heightened sense of uncertainty, adding to the downside risks for confidence and activity.”

“We think Sterling’s post Brexit plunge will push inflation above 3% in 2017 (above the BoE’s 2.7% forecast) and we doubt wages will respond given cautious business sentiment. This risks the return of the “cost of living crisis” , which squeezes household spending power. We therefore think that the BoE will look to provide more stimulus in 2017 with a rate cut in 1H17 and the prospect of additional QE should UK asset prices come under downward pressure and financial conditions tighten.”