BoE leaves policy unchanged, but becomes more optimistic - ING

James Knightley, Senior Economist at ING, notes, "The BoE has revised up GDP growth forecast for 2017 to 2% (consensus 1.4%) but has left inflation largely unchanged. While continuing to signal rates could go up or down from here, the hawks are starting to sound a little more concerned."

Key Quotes

"The Bank of England has left monetary policy unchanged today (unanimous vote) so Bank Rate stays at 0.25% and the size of the Asset Purchase Facility is kept at £435bn and the Corporate bond-buying programme remains £10bn." 

"The big headline is that the Bank of England has raised its 2017 GDP growth forecast from 1.4% to 2% with 2018 GDP growth at 1.6% and 2019 at 1.7% on the back of “the fiscal stimulus announced in the Chancellor’s Autumn Statement”, better global growth and “more supportive credit conditions”. Despite this upgrade, they have made little change to their inflation forecasts, citing offsets from sterling’s recent appreciation, a higher yield curve and higher supply capacity due to a re-evaluation of the labour market. Inflation is expected to be 2.4% in three years’ time."

"In terms of future guidance, the BoE remain of the view that “monetary policy can respond, in either direction, to changes to the economic outlook as they unfold”. However, it repeated that “there are limits to the extent that above-target inflation can be tolerated”. The minutes to the meeting added more ominously that “for some members, the risks around the trade-off embodied in the central projection meant they had moved a little closer to those limits.”

Statements questioning the validity of the numbers is a dollar-negative

"Currently, the implied probability of a rate hike from the Bank of England (based on the OIS curve) is 39% while the chance of a rate hike by end 2018 is 76.8%. Given the downside risks to growth and upside risks to inflation that Brexit is creating we forecast no change in Bank Rate until 2019."

"We are less optimistic on activity than the BoE. We expect growth to slow to 1.5% this year from 2% in 2016.. Employment has fallen in the last two monthly reports while business surveys point to a moderation in investment intentions. Consumer confidence has weakened in response to rising inflation, which is likely to erode household spending power, while consumer credit has taken a noticeable downturn."

"On the other hand, Inflation continues to move higher (we think it will rise more aggressively than the BoE predicts) as a direct response to the steep drop in sterling. It is most noticeable in petrol prices, which are up nearly 20% on a YoY basis, but food prices are also starting to respond given 40% of the UK’s consumption is imported." 

"Other components are starting to experience pipeline pressures so we expect headline CPI to rise above 2% in the next couple of months and remain above 3% for much of 2H17. Given we expect growth to be well below trend in 2017/18 we feel the BoE will “look through” the inflation spike, much as it did when CPI rose above 5% in 2008 and 2011."

Fed maintained its target range unchanged at 0.50-0.75%