Strong GBP still a concern for BoE – buys time before the crucial meeting in December

As expected, the Monetary Policy Committee (MPC) kept the Bank Rate and stocks of purchased assets unchanged at 0.50% and GBP375bn, respectively. The vote was once again 8-1, as Ian McCafferty still voted in favour of increasing the Bank Rate by 25bp immediately. The 8-1 split vote indicates that the views of the MPC members are more aligned than they appear beneath the surface. The minutes still indicate that 'there is a range of views among MPC members about the balance of risks to inflation' relative to the projection in the Inflation Report. Currently, one MPC member is very hawkish, voting for a hike, while two MPC members have been relatively hawkish in speeches despite not voting for a hike recently.

In the other camp, one MPC member is very dovish, while two MPC members are relatively dovish. In between is Governor Mark Carney who has said that the timing of a hike is likely to come into 'sharper relief' by the 'turn of the year' and two members whom have not said anything significant on monetary policy and who are expected to mirror Carney. In other words, Carney has the power to move the majority from unchanged to increase. With respect to the Inflation Report, the inflation path was revised downward as inflation is projected to stay below 1% until H2 16. The main reasons for the lower projection are the lower oil price, announced energy bill price cuts and the appreciation of the GBP, which the BoE now estimates will affect CPI inflation for a longer period than it estimated previously. The latter is a result of the BoE's reassessment of the pass-through from exchange rate movements to import prices. Hence, movements in the GBP (especially the trade-weighted GBP) should be monitored more closely.

Markets seem to have reacted to the lower inflation outlook, although this was mentioned at the October meeting. GDP growth was revised down slightly for this year and next year but unchanged in 2017 and 2018. GDP growth is still expected to be at or slightly above trend over the forecast horizon and thus we expect slack to continue to diminish. As mentioned by the MPC, the 'domestic momentum remains resilient' even though the 'outlook for global growth has weakened'. Economic growth is domestic driven.

"The unemployment rate has fallen faster than previously estimated by the BoE. As a result, it has lowered the projection of the unemployment rate in 2016. Surprisingly, the BoE has lifted slightly its projections for 2017 and 2018. Overall, the economic outlook remains solid and it expects the unemployment rate to crawl below NAIRU soon. This is in line with our expectation. For now, we stick to our view that the BoE will hike in Q1 16, probably in February, but today's announcements imply that the probability a hike will come later, in Q2, has risen", says Danske Bank.

"We still think underlying wage growth is trending up due to the tighter labour market, which put more pressure on the BoE than currently recognised. We think the next meeting in December will be crucial for our call. In our view, it is likely the BoE is awaiting action by the ECB, which we expect to ease monetary policy in December. The next BoE meeting is due to be held a week after the ECB's December meeting", added Danske Bank.