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4 Feb 2016
Bank of England firmly on hold for at least the next six months - UBS
The Bank of England's February monetary policy meeting and inflation report saw the bank bring its forecasts closer into line with market expectations. According to the UBS analyst team, the risk before the meeting had been that the bank would pull a big surprise to the dovish side given current global developments. UBS continues to see sterling becoming slightly stronger in the coming months, but acknowledge the likelihood of volatility around the EU referendum vote.
Key Quotes
“After initially falling around 0.5%, sterling recovered and was almost unchanged against the US dollar by the end of the press conference. We continue to see sterling becoming slightly stronger in the coming months, but acknowledge the likelihood of volatility around the EU referendum vote.”
“The monetary policy meeting ended with a unanimous vote to keep rates on hold. One small surprise was that the longstanding hawk Ian McCafferty removed his vote for higher rates and joined the rest of the committee, though this had been speculated upon in the market in recent months.”
“The committee did discuss the global developments and how they could possibly impact the UK economy. Looking at the new forecasts in the inflation report, the bank seems to have balanced a number of negative factors with some positive factors, leaving the forecast for inflation surpassing the 2% threshold in 2–3 years unchanged. In the bank's assumptions, the oil price has gone down, but so has the level of market-implied interest rates and the exchange rate, balancing the oil price drop to some extent. Furthermore, the bank downgraded growth and inflation, specifically in the near term, while also expecting a lower unemployment rate.”
“Overall, we take today's meeting as a confirmation that the Bank of England is firmly on hold for at least the next six months and will not even think about raising rates until the second half of the year. However, compared to current market pricing for the first rate hike in 2H17, we continue to see upside potential for sterling from current levels and reiterate our short-term opportunistic trading idea to overweight sterling against the Australian dollar.”
Key Quotes
“After initially falling around 0.5%, sterling recovered and was almost unchanged against the US dollar by the end of the press conference. We continue to see sterling becoming slightly stronger in the coming months, but acknowledge the likelihood of volatility around the EU referendum vote.”
“The monetary policy meeting ended with a unanimous vote to keep rates on hold. One small surprise was that the longstanding hawk Ian McCafferty removed his vote for higher rates and joined the rest of the committee, though this had been speculated upon in the market in recent months.”
“The committee did discuss the global developments and how they could possibly impact the UK economy. Looking at the new forecasts in the inflation report, the bank seems to have balanced a number of negative factors with some positive factors, leaving the forecast for inflation surpassing the 2% threshold in 2–3 years unchanged. In the bank's assumptions, the oil price has gone down, but so has the level of market-implied interest rates and the exchange rate, balancing the oil price drop to some extent. Furthermore, the bank downgraded growth and inflation, specifically in the near term, while also expecting a lower unemployment rate.”
“Overall, we take today's meeting as a confirmation that the Bank of England is firmly on hold for at least the next six months and will not even think about raising rates until the second half of the year. However, compared to current market pricing for the first rate hike in 2H17, we continue to see upside potential for sterling from current levels and reiterate our short-term opportunistic trading idea to overweight sterling against the Australian dollar.”