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Will the BoE bring inflation in line?
The problem this time, however, was that whilst the BoE had based most of its assessment on a smooth Brexit, that assumption had been paired with a set of interest rate projections which built in a far from negligible risk of a disorderly Brexit (Bank rate of 0.5% in 2020, compared against 1.0% in the May projections). Combined together, this “inconsistency” set the stage for a three year ahead inflation forecast of 2.37%.
Governor Carney continued to argue that the policy response would not be automatic, but that the BoE would do what it could.
Under these sensitivities, it is clearer why the BoE maintained its advice that increases in interest rates, “at a gradual pace and to a limited extent”, would be appropriate. Note though that this guidance is tied explicitly to the assumption of a “smooth Brexit” and additionally “some recovery in global growth”. Under a more disorderly Brexit, Governor Carney continued to argue that the policy response would not be automatic, but that the BoE would do what it could. He directed listeners however to previous comments he had made on this subject, namely where he previously hinted that personally, he thought it would be “more likely that we would provide some stimulus in that event” [i.e. under a no-deal Brexit].
Brexit uncertainty at the forefront
At this time, with Brexit uncertainty front and centre and with planned limited rate rises seen as suitably far off, the BoE can easily afford to watch and wait to see if the global backdrop improves. But the minutes appear to give the impression that if and when Brexit uncertainties subside, the Bank would be looking for some reassurance on global growth momentum too, before making any step forward to tighten policy.
Carney keeping cards close to his chest
Beyond this, there were no revealing insights from the BoE Governor over how he sees Brexit playing out, though he did state that we can expect some updated disorderly Brexit analysis from the Bank, probably in September.
Interest rate markets adjusted a little more amidst the more cautious global growth assessment, to price in a slightly flatter path for rates over the medium term.
Sterling moves continue to be dominated by news on Brexit rather than fundamental economic information. The same was true of today’s press conference. With sterling already at more than 2-year lows against the USD ($1.2098 at the time of writing) as investors focus on no-deal risks, speculation from the BoE over how policy might move under different states of the world left little discernible mark on the currency. Interest rate markets adjusted a little more amidst the more cautious global growth assessment, to price in a slightly flatter path for rates over the medium term.
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