BoE Watch

2 min read
Divyang Shah

In contrast to last week’s dovish Quarterly Inflation Report the minutes of the May MPC meeting are more neutral. The market focus on the downward revisions to productivity last week got a more balanced assessment within the minutes. What still stands out is the dominance of uncertainty with the MPC divided on the future pace of wage rises and holding a range of views on the most likely path of the Bank Rate.

What we are left with is a reiteration that it is more likely than not that the Bank Rate would rise over the 3yr forecast period. The BoE is not yet ready to fine-tune market expectations as to the timing of liftoff but we think that they are waiting for the Fed to make the first move. The gyrations in the bond markets last October and more recently highlight that the process of normalisation could be bumpy as investors have not been adequately compensated for liquidity or duration risk.

It is unlikely that we will get clearer signals from the BoE until the Fed has hiked rates, and this is currently priced by the market as most likely to happen in December.

Although the timing of Fed lift off has been a moving target as low inflation has yet to show signs of turning around. The US will release its inflation data this Friday and is expected to stay at -0.1% from March. The UK inflation print suggests downside risks to US inflation. UK inflation data for April yesterday saw its first negative print in 60-years with the core rate of inflation (ex food, energy, tobacco, and alcohol) at 0.8% y/y after 1.0% in March.

Divyang Shah