BoE likely to hike Bank Rate to 0.75 pct amid rebound in activity indicators, lower unemployment rate: Danske Bank

The Bank of England (BoE) is expected to hike the benchmark Bank Rate from 0.50 percent to 0.75 percent, as activity indicators have rebounded and the unemployment rate is low, according to the latest research report from Danske Bank.

While the central bank is still believed to be too optimistic about the inflation outlook, it seems that Mark Carney and company are more concerned about overheating the economy. Despite growth on average being lower now than before the Brexit vote, it is still sufficient to absorb the remaining slack, as potential GDP growth has declined as well.

Like many other central banks around the world, the Bank of England believes in the Phillips Curve and thinks the underlying inflationary pressure is increasing as the labor market continues to tighten. The BoE had made a significant change to its QE guidance at its last meeting, as it said it would not consider reducing the stock of purchased bonds until the Bank Rate reaches 1.5 percent (previously 2.0 percent). This is a sign that it thinks the natural rate is low and that it does need to raise the Bank Rate many times before monetary policy is neutral.

"We expect the Bank of England to hike once next year. With respect to the tone of voice, we do not expect big shifts. We could see a bit of a relief from the recent sell-off pressure in GBP from the political side after the UK Prime Minister yesterday relegated the Brexit department. However, overall we look for EUR/GBP to remain range bound near term, with Brexit uncertainty expected to remain a key source of volatility," the report added.