BoE: Tightening during Brexit? - Natixis

Sylwia Hubar, Research Analyst at Natixis, explains that the BoE will tolerate above-target inflation this year, but gradually closing output gap is expected to reduce the Bank’s tolerance in the latter part of the forecast period.

Key Quotes

“The governor warned that the Bank may rise interest rates faster (possibly next year) and to a larger extent than currently priced in by the markets. The BoE conditions its current outlook on: 1/ a smooth Brexit process, 2/ a significant pick-up in wage growth, and 3/ no further slowing in aggregate demand.”

“Still, the BoE has stressed that there is a risk that the trade-off the Bank faces between excess capacity and above-target inflation could result in the BoE responding in the opposite direction than currently planned, namely by cutting the interest rates should the economy weaken more considerably dragged down by the Brexit process.”

“We expect no change in the monetary policy stance this year given that wage growth will stay subdued and household consumption will further weaken. Also, we do not expect the Brexit process to be “smooth” and so we see it as unlikely that the BoE will tighten its monetary policy during the Brexit negotiations.”