MNI 5 THINGS: BOE Sees UK CPI to Target on 3 Hikes in 3 Yrs

By Jai Lakhani, Jamie Satchithanantham and David Robinson

     LONDON (MNI) - The following are the key points from the May MPC monetary

policy decision, Inflation Report and accompanying minutes published Thursday by

the Bank of England:

     - The MPC anticipates inflation returning to target by Q2 2020, earlier

than expected in its February forecast. This projection is based on the market

curve for three hikes over the three year forecast horizon. Q3 2018 marks the

first of the three expected hikes with the following two in the third quarters

of 2019 and 2020, with the Bank rate at 1.2% by the end of 2020. This profile

leaves an August 25 bp hike on the table.

     - As MNI analysis pinpointed, the trend of insiders preserving the status

quo and externals being more "hawkish" in nature extended in May. The two

dissenters in May were the usual suspects, Ian McCafferty and Michael Saunders -

externals. Of the last 411 votes, there have been 32 votes against the final

outcome, with only two of these from insiders who voted against a rate hike in

November 17. This is in sharp contrast with the outsiders, where 29 votes have

been for a higher rate than the outcome.

     - Q1's weak showing was culpable for the near-term downgrade in the MPC's

updated growth forecast. Four-quarter growth in real GDP was revised down to

1.4% in Q2 2018, from February's 1.8% estimate. However, these figures exclude a

backcast and thus incorporates the 0.1% Q1 growth rate despite the uncertainty

surrounding the true impact of the adverse weather. The Bank estimate the snow

knocked off 0.1pp off Q1 output growth.

     - The Bank's forecast for CPI, based on market expectations, was for it to

remain above the 2% target over the next 3 years and the MPC's projections were

based on a market-implied path for Bank Rate that was around 15bp higher than in

November. That path showed a gradual further rise in Bank Rate to just under

1.2% at the start of 2021.

     - Average weekly earnings were revised down to 2.75% for 2018 from

February's 3% estimate, however the rest of forecast horizon was unchanged at

3.25% for 2019 and 3.5% for 2020. The 2018 revision was attributed to

weaker-than-expected previous productivity growth. Post 2018, the Bank argues

the continued absorption of slack will help support earnings. The jobless rate

was seen dipping below the Bank's estimate for the natural rate (4.25%> as soon

as the Q2 2018. The rate's entire path was revised down to 4.1% for Q2 2018,

down from 4.2% in February and 4% in 2019, 2020 and 2021. The MPC previously

forecast unemployment to stand at 4.2% Q2 2019 before dropping to 4.1% a year

later.

--MNI London Bureau; tel: +44 203-586-2225; email: les.commons@marketnews.com

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