BoE: Limited scope for tightening, despite building price pressures – ABN AMRO

Bill Diviney, senior economist at ABN AMRO, notes that the BoE kept policy on hold yesterday, and in its Quarterly Inflation Report, upgraded its GDP forecasts on the back of Brexit-related stockpiling, which has boosted growth in Q1 according to the Jan-Feb data.

Key Quotes

“In the press conference, Governor Carney continued to note concern over the pernicious effects of Brexit on investment – which surveys suggest will fall for the longest period since the Second World War – but also said that interest rates would have to rise at a quicker pace than that currently expected by financial markets (currently just one hike by end 2021), should an orderly Brexit prevail. This is due to the buildup of domestic inflationary pressure, partly on the back of the aforementioned decline in investment, which is weighing on productivity and pushing unit labour cost growth higher.”

“Indeed, while near-term projections for inflation were revised down, due to lower projected oil prices, the Inflation Report fan charts indicate an upward sloping trajectory towards the end of the forecast horizon, in contrast to the flat trajectory in the February inflation report. With that said, inflation at the end of the BoE’s forecast horizon – in Q2 2022 – is still projected at just 2.2%, only marginally above its 2% target.”

“As such, and given the headwinds the economy faces – not just from Brexit, but a weak global trade environment, and a cooling housing market – we continue to expect relatively subdued growth and inflation over the coming quarters, with just one rate hike from the BoE next year.”