Bank of England review: No big surprises

There were no big surprises in the announcements from the Monetary Policy Committee (MPC)'s September meeting. As expected, there was another 8-1 split vote on whether to keep the Bank Rate unchanged or raise it immediately. The MPC voted unanimously in favour of keeping the stock of purchased assets unchanged at GBP375bn. The data between the August and September meetings have been mixed: On the one hand, core inflation surprised on the upside in July.

On the other, financial stress and China concerns have increased, while the oil price has dropped further. That said, the minutes indicate that MPC is currently not worried about the development in China and emerging markets although 'the downside risks to world activity have probably increased'. As some of the eight members voting for an unchanged Bank Rate stated that they see upside risks to inflation, the minutes were slightly hawkish, if anything.

"We are still positive on the UK. The economic upturn in the UK remains on track with growth rates above or at trend (0.5% q/q), the unemployment rate is more or less back to 'normal' and wage growth has increased. However, both we and the MPC expect inflation to remain close to 0% in the coming months as the lower oil price and strong GBP weigh on inflation and one cannot rule out that inflation may turn negative", says Danske Bank.

 In other words, the MPC is still worried about the near-term inflation outlook and most MPC members are not comfortable raising rates with higher uncertainty in the near term. In line with the MPC, we expect inflation to pick up in January when the base effects from the oil price drop in H2 14 disappear. Thus we still believe that the MPC will raise the Bank Rate in Q1 16, probably in February. See also Research UK: Economic upturn on track - inflation to pick up next year, 4 September 2015.

"All in all, our view has not really changed. EUR/GBP and GBP/USD are likely to remain volatile ahead of the FOMC meeting next week and thus we do not expect the GBP to rally much further", added Danske Bank.