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Neither the Bank of England (BoE) nor the European Central Bank (ECB) is expected to change their monetary policy stances throughout the remainder of 2017. However, following their latest respective policy meetings, the market has started to ‘price-in’ potential tightening from both.
As recently as last month, monetary policy appeared to be side-lined as a driver of GBP/EUR. The market had expected both the BoE and ECB to leave their respective policy rates unchanged for the rest of 2017. However, following their March meetings, the market have been alerted to the prospect of central bank tightening sooner than it was anticipating, Lloyds Bank reported.
While the BoE base rate was left at 0.25 percent at its latest policy meeting, a surprise was sprung by the MPC’s 8-1 vote. Kristin Forbes, a known hawk, who had previously opposed some of the emergency easing in the aftermath of the EU referendum, plumped for an immediate hike in interest rates.
"In spite of this re-pricing, we do not expect a rate rise from the BoE over our forecast horizon. There have been early indications that the consumer may be starting to feel the strain of the combination of higher inflation and limited wage growth, as evidenced by the disappointing UK retail sales, BRC sales and John Lewis sales data," the report commented.
The MPC is likely to be more sensitive to the growth outlook than the inflation outlook (having already indicated that the underlying drivers of higher prices, rising energy prices and GBP depreciation are transitory in nature, and therefore are unlikely to engage in imminent tightening.
Meanwhile, the market implied probability of a deposit rate hike by the end of the year is now above 50 percent. The next milestone to watch for is a change in its forward guidance, which could come as soon as June (the first policy meeting after the French Presidential election).
