Henderson: The Old Lady takes a neutral policy stance

Henderson’s Mitul Patel, Head of Interest Rates, shares his views on the bank’s latest policy stance and forecasts for growth and inflation.

The Bank of England chose to keep rates unchanged today, as was broadly expected by the markets. Although inflation is expected to rise to a peak of 2.8% in Q2 2018, much higher than the 2% target, the Bank of England has maintained its neutral policy stance. Most notable in the forecast revisions was the significant upgrade to forecast growth, which is now predicted to be 2% during 2017, up from 1.4% in 2016. Consumption is expected to be firmer than expected as a result of further falls in the savings ratio, to the lowest levels on record. Another key change was the expectation that the equilibrium unemployment rate is now judged to be around 4.5%, from 5% in earlier forecast rounds.

The Bank of England’s current policy stance appears truly neutral, with the potential for further easing should the economy weaken by more than expected, or to tighten should domestically generated inflationary pressures appear stronger than expected. There remains significant uncertainty over the forecasts and we remain vigilant as a result to changes in the data.

Sterling weakened and gilts rallied in response, reflecting the view that if the current forecast strength in the economy is not enough to shift the Bank of England in a hawkish direction, then it will take something dramatic to cause a shift out of neutral.