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Hawkish Dissent at Bank of England

By:  Thomas Bloomfield Posted:  16 Mar 13:00

Bottom Line:

The Bank of England (BoE) left policy unchanged, but Kristin Forbes voted for a Bank Rate increase and others are beginning to subscribe to her views. Implied rates suggest markets are yet to be convinced, as Brexit remains on track and Forbes’ term expires in two meetings.

The BoE kept monetary policy unchanged in March. However, in a hawkish turn of events, Kristin Forbes—who we expected to be overtly hawkish—voted in favor of a 25-bp increase in Bank Rate, while “some members” noted that relatively little further upside news on activity or inflation would be required to consider reducing policy support.

The hawkish stance taken by the MPC was prompted by rapidly rising inflation alongside mixed evidence to suggest that domestic activity is slowing. There are signs that the squeeze on households from subdued average earnings and rising inflation are feeding into spending. However, Forbes expects this to be supported by other components, most notably net exports.

The hawkishness was mitigated somewhat by warnings related to Brexit, namely the potential for rising uncertainty over future trading relationships with the EU. With Article 50 now a done deal, focus shifts to the Great Repeal Bill, potentially raising even greater constitutional questions.

We maintain that MPC members will want to observe data during the ongoing Brexit process, opting to leave policy unchanged in 2017. Additionally, Forbes only has two votes left before being replaced by a member more likely to fall in line with the majority.

Markets were caught off guard, lifting sterling and in turn knocking FTSE100 down from the all-time high made earlier in the day. The yield curve shifted higher by several basis points, but markets are yet to be convinced that an interest rate increase is on the cards anytime soon.

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