BoE expected to deliver a mildly hawkish tone next week - Rabobank

With almost all other G10 central banks likely to reduce policy accommodation this year, analysts from Raboban, consider that it is difficult to anticipate that just one more rate hike from the Bank if England can lift GBP much further going forward.

Key Quotes: 

“During a panel discussion at the recent World Economic Forum in Davos, BoE Governor Carney spoke of major central banks being on a “regime shift” towards normalisation. His comments were set against a description of world growth that was becoming “stronger, broader and healthier”. The latter, according to the Governor, is a function of the acceleration of growth in the G7 being largely the result of an improvement in net trade and investment. A few days later, however, Carney was commenting that UK investment is 4 ppts below where it should be. Previously Carney has indicated the current recovery in investment in the UK has been supported by the cyclical upturn but supressed by domestic political uncertainty.”

“The overall tone of Carney supports the market consensus that there are further BoE rate hikes in the pipeline. That said, the uncertainties linked with Brexit present a unique backdrop that complicates the outlook for monetary policy in the UK. We see a strong chance of one rate hike at the end of this year.”

“We are watchful for signs that the Bank could be minded to squeeze in two moves during the course of 2018, potentially to coincide with the May and November Inflation Reports. We expect a mildly hawkish tone from the February 8 policy meeting.”

“The hawkish tone of the BoE was the trigger for GBP’s notably strong performance last September and is another key reason behind GBP’s recent resilience. That said, with almost all other G10 central banks likely to reduce policy accommodation this year, it is difficult to anticipate that just one more BoE rate hike can lift GBP much further going forward. Currently the probability of a second rate hike this year is partially priced in. If the market were to start believing in a heightened risk of a second BoE rate hike this year, GBP could find further incentive. For this reason we will be watching signs of domestically generated inflation closely in the coming months, in particular wage growth.”

“A third reason that can be linked with GBP’s recent resilience was a perceived improvement in the political backdrop.”