NEWS Breaking news

Bank of England “tightens modestly”

As expected the Bank of England (BoE) announced a 25bps rate hike, the first for a decade, and voted unanimously to maintain the stock of purchased assets at current level.

In line with recent policymaker comments, we expect policy changes beyond today’s modest tightening to be “gradual” and “limited”, and this month’s dovish rate hike could be viewed as somewhat of a monetary policy oxymoron.

In our view, external rather than domestic drivers have supported the UK economy since the Brexit outcome, with global, and in particular European, growth surprising to the upside. As these drivers begin to fade, we think weaker business investment and slower migration flows could weigh on both the growth and inflation outlook, providing we do not experience renewed weakness in the British pound. And although UK inflation remains above the BoE’s 2% target, we think market pricing overstates the pace of monetary tightening.

Developments that would lead us to recalibrate our view include constructive Brexit negotiation developments and a looser fiscal policy outlook following the upcoming Budget (November 22).