MNI REVIEW: BOE Signals Rate Hikes, Sees Higher Inflation

By David Robinson and Irene Prihoda

     LONDON (MNI) - The Bank of England signalled that more rate rises will be

needed than markets have been expecting as it forecast rising inflation over the

next few years, its Inflation Report and minutes of its May Monetary Policy

Committee meeting showed.

     While there were no dissenting votes or voices in the 9-0 vote to hold Bank

Rate steady at 0.75%, Inflation Report projections showed the rate of price

increases overshooting the 2.0% inflation target in two years' time and

continuing to rise, reaching 2.16% three years out if - as investors expect --

there is only one 25-basis-point rate hike over the next three years.

     Bank of England guidance was that the single hike the markets have priced

in would be inconsistent with the MPC's remit, Governor Mark Carney said at the

press conference, adding that a smooth Brexit transition would "require more,

and more frequent interest rate increases, than the market currently expects."

     The market rate curves are, however, based on different assumptions than

the MPC's collective projections, so any read across from one to the other is

tricky.

     Investors, unlike the MPC, attach some probability to a disorderly Brexit

whereas the Bank's projections are based on an average of outcomes that exclude

the cliff-edge no-deal scenario.

     Carney noted that no Brexit deal "is still there as the default option,"

and the fact the BOE excludes it is a forecasting convention rather than a

reflection of reality.

     The MPC could have signalled that markets were underpricing rate hikes

through one or two dissenting votes for higher rates or at least a block of text

in the minutes making the case for tightening.

     Instead, the collective message was that if Brexit proceeds smoothly then

markets will need to reprice. The Committee, meanwhile, can afford to

wait-and-see how things unfold.

     Domestic inflation indicators have been mixed and Brexit uncertainties

could continue to drag on business investment and consumption. "The cost of

waiting for further information was relatively low," the minutes said.

     The MPC's survey of businesses showed Brexit continuing to weigh on

investment and that firms' planning was largely unaltered by the deadline for

the UK's departure from the EU being pushed back from March to October.

     The BOE's near-term growth forecast was raised, to 0.5% on the quarter in

Q1 from 0.2% previously, but this reflected in part the boost due to

Brexit-related-stockpiling.

     Inflation was shown below target from Q3 2019 through Q4 2020, easing

     the pressure on the MPC to act immediately.

     The next key meeting for the MPC will be in August. The May minutes show

that a hike then cannot be ruled out, although it will hinge on whether

substantial progress is made in the Brexit process.

--MNI London Bureau; +44 203 865 3829; email: jason.webb@marketnews.com

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