Bank of England likely to hike bank rate by mid-2019

The Bank of England’s MPC kept the bank rate and the other policy parameters on hold in May. The MPC minutes released reiterated the readiness of policy to respond in either direction – an implicit ‘neutral’ policy bias relative to market expectations that currently fully discount a 25 bp bank rate hike by the mid of 2019, noted Lloyds Bank in a research report.

The minutes implied that “some” other members might be receptive to a tighter policy stance, requiring “relatively little” further upside news on activity or inflation for them to do so. Still the MPC is seen as staying highly attuned to emerging signs of consumer weakness as sterling’s post-referendum drop depletes purchasing power, stated Lloyds Bank.

The underlying wage growth continues to be muted, dropping to just 2.1 percent in the three months to March. This eases the appetite for tighter policy amongst the bulk of the MPC. Even if inflation accelerates more than 3 percent around the end of this year, a majority for a hike would fail to merge.

In the meantime, the likelihood of a disorderly exit from the EU might evidently have an impact on the policy outlook. The bulk of the MPC would be cautious of reversing the stimulus of August 2016 prematurely. However, in the months ahead a prolonged period of above-target inflation is expected to test the willingness of most on the MPC to tolerate the current monetary policy stance, added Lloyds Bank.