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Bank of England's Brexit views in focus as rates set to stay on hold

EconomyDec 13, 2017 07:10PM ET
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© Reuters. A statue is silhouetted against the Bank of England in the City of London

By David Milliken

LONDON (Reuters) - The Bank of England's views on Brexit will be scrutinized by investors on Thursday when the central bank announces its first policy decision since raising rates for the first time in more than a decade last month.

Both financial markets and economists expect BoE officials will wait nearly a year before raising interest rates again - a much slower pace of tightening than the U.S. Federal Reserve.

The "very gradual" pace of tightening signaled by the BoE last month reflects both uncertainty about the economic impact of ongoing talks to leave the European Union, as well as weak underlying inflation pressures that belie a headline rate at its highest in nearly six years.

Last week's judgment by the European Commission that Britain had made sufficient progress in Brexit talks to move on to negotiations over trade and an interim deal to cover the period until 2021 should reinforce the BoE's assumption that the Brexit process will be smooth.

"We expect a 'holding position' from the BoE ... and a neutral tone on Brexit progress," said Robert Wood, UK economist at Bank of America Merrill Lynch (NYSE:BAC).

Like most economists polled by Reuters, he expects the BoE's Monetary Policy Committee to vote 9-0 to keep rates at 0.5 percent, after a 7-2 split in favor of raising rates by a quarter of a percentage point last month.

BoE Governor Mark Carney has said the central bank will focus on consumers' and businesses' reaction to Brexit talks, rather than make its own judgment about the economic impact.

Wood said he did not think last week's Brexit progress - which had been in some doubt - would make the BoE raise rates sooner in 2018.

Consumer demand has faltered this year mostly due to rising inflation - not Brexit worries - so last week's agreement removed a downside risk, rather than pointing to stronger growth. Figures overnight pointed to the weakest housing market since 2013.

Last month the BoE maintained its forecast that the economy would grow 1.6 percent next year - slightly faster than expected by the government and most economists polled by Reuters.

Since then, inflation has risen to its highest since March 2012 at 3.1 percent. The BoE says this overshoot is almost all due to sterling's fall after June 2016's Brexit vote, and it expects inflation to fall slowly next year.

Wage growth - which many BoE policymakers view as a good guide to medium-term inflation pressures - remains slow, with regular pay in the three months to October up just 2.3 percent on a year earlier.

However Wolfgang Bauer, a fixed income fund manager at M&G Investments, said Brexit made the BoE the hardest major central bank to predict for next year based on economics alone.

"If there are some hiccups in the negotiation process - and I think that is very likely - we could see some pressure on sterling," he said.

"That ... might make the Bank of England want to have a bit more of a tighter monetary policy. On the other hand, if there's a less-than-ideal Brexit on the horizon, that might dampen economic growth."

Bank of England's Brexit views in focus as rates set to stay on hold
 

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