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Lee Sue Ann [email protected] Global Economics & Markets Research Email: [email protected] URL: www.uob.com.sg/research Friday, 16 June 2017 Flash Notes Bank Of England’s Split Widens The Bank of England (BoE) maintained interest rates at 0.25% and made no changes to its bond-buying programme. The vote was split, however, with three members voting for a rise: Ian McCafferty and Michael Saunders joined Kristin Forbes, who has been voting to raise rates since March. Saunders’ move is potentially very significant given that he is not excessively hawkish. There were comments that the continued growth of employment could indicate that spare capacity in the economy is being eroded, lessening the trade-off that the MPC needs to balance and reducing the MPC’s tolerance of above-target inflation. The MPC also noted that the GBP had been subjected to renewed selling which will put fresh upward pressure on import prices, but average earnings growth remained subdued. Overall, inflation is expected to overshoot the target by a larger margin than expected previously and to remain above target throughout the 3-year period. The market implied probability of a rise over the next year has jumped sharply on the back of this news. However, we think the surprisingly hawkish outcome does not necessarily mean a rate hike is near. We have previously seen periods of split votes before: in 2011, when three members voted to raise rates, and also in 2014 and 2015, when McCafferty and his former colleague Martin Weale voted against the majority in favour of tightening policy. Besides, the string of recent data amplifies the BoE’s dilemma. On the hawkish end, we have seen the further rise in inflation, both headline and the Bank’s core measures, and the ongoing strength seen in ILO employment. However, on the dovish end, we have seen weak retail sales data, alongside the subdued nature of earnings growth also seen in the labour market report. In our view, this could lead to a protracted period of split votes. For now, we keep to our view that rates will stay on hold this year and next, especially against a backdrop of political uncertainty. Also worth noting is that whilst the BoE announced that Chief Economist Andy Haldane’s term on the MPC will be extended to June 2020; replacements for Charlotte Hogg and Forbes have not yet been announced. The question now is who the new members will be and where they stand. There is no meeting in July, with the next meeting scheduled for 3 August, where the central bank will also be releasing its quarterly inflation report. GBP/USD moved sharply higher following the decision with GBP/USD rallying to the 1.2795 region. EUR/GBP also declined sharply to the 0.8723 levels. We think the choppy swing has resulted in a mixed outlook and this pair is expected to trade sideways from here, likely not moving much out the 1.2691/1.2795 range seen yesterday. Recent Publications 15 Jun Indonesia: BI Continues To Hold Interest Rates 15 Jun Jun 2017 FOMC: Another Hike & BSR Details But Still No Start Date 13 Jun FOMC & BOJ Preview: Some Expectation For Fed But None For BOJ 09 Jun UK: It’s June, May Is Gone 09 Jun UK Exit Polls Point To Tory Minority Disclaimer: This analysis is based on information available to the public. Although the information contained herein is believed to be reliable, UOB Group makes no representation as to the accuracy or completeness. Also, opinions and predictions contained herein reflect our opinion as of date of the analysis and are subject to change without notice. UOB Group may have positions in, and may effect transactions in, currencies and financial products mentioned herein. Prior to entering into any proposed transaction, without reliance upon UOB Group or its affiliates, the reader should determine, the economic risks and merits, as well as the legal, tax and accounting characterizations and consequences, of the transaction and that the reader is able to assume these risks. This document and its contents are proprietary information and products of UOB Group and may not be reproduced or otherwise. Singapore Company Reg No. 193500026Z.
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