BoE holds fire, but have markets overreacted? - ING

In light of the dreadful first quarter growth reading, the Bank of England has opted to keep rates on hold this month, but markets have interpreted the overall tone of the meeting as more dovish than anticipated as money markets have priced out a 2018 rate hike, explains James Smith, Developed Markets Economist at ING.

Key Quotes

“Reading through the statement, we suspect this is a bit of an overreaction. The Bank is keen to emphasise that it thinks the weaker growth will prove to be temporary – and interestingly, that the initial estimate of 1Q GDP has been wildly underestimated. The latest forecasts assume an upward revision from 0.1% to 0.3% QoQ.”

“It also remains upbeat on the outlook for wage growth. Although it has nudged down its forecast to 2.75% for this year, it appears satisfied that the tight jobs market is translating into higher pay.”

“Importantly, the Bank still feels that further “ongoing” tightening would be “appropriate”, and all of this makes us think that policymakers still have a preference to hike in August if the data allows them to.”