Liquid Insight: BoE Preview: Ready, steady… hold.

Research evidence excerpt

Liquid Insight: BoE Preview: Ready, steady… hold.

We expect the Bank of England (BoE) to keep the Bank Rate on hold at 3.75% at its

meeting this week. Dovish inflation/labour market data, fall in energy prices, lack of

explicit guidance on June and MPC’s patient approach is likely to mean a hold. The dovish

data should reduce the urgency for the BoE to act, especially with swing voters not

showing a rush to hike. So far, the MPC is taking comfort from the tightening in financial

conditions which they say can give them time to assess and gather evidence on whether

to hike or not.

Data since April has been somewhat dovish

Data since April has been somewhat dovish with a 100K fall in April payrolls, rise in

unemployment to 5.0%, softer PMIs, softer private pay growth at 3.0% and weaker than

expected inflation. We would argue that the data was less dovish than it appears at face

value. We would be cautious in overinterpreting the downside surprise in April services

inflation/ big fall in April payrolls, given erratic components driving some of the fall.

Payrolls tend to be revised often and in April revisions are normally large. But

nonetheless it should reduce the urgency for the BoE to act. Data next week would be

key to see if the volatile weakness in inflation/ labour market reverses to some extent.

The DMP showed a further small pick-up in near term inflation expectations/ business

own price expectations in May on a three-month basis, while the single month print

showed a small moderation. Medium-term inflation expectations remained unchanged

while wage expectations looked benign for now. We think DMP was not alarming enough

for the BoE to hike in June (especially with the fall in single month), but the longer