Yesterday’s Bank of England (BoE) meeting brought the widely expected hold of the policy rate at 0.25% as well as unchanged targets for gilt purchases (£435bn) and for corporate bonds (£10bn).
Considering the robust economic backdrop since the Brexit referendum, the central bank can comfortably allow itself to wait and see how the Brexit saga evolves next year – the projected rate cut for next year remains off the table for the time being.
In this context, the BoE mentioned increased volatility to be expected next year as markets will alter their view on the severity of the Brexit alongside the political news flow.
The central bank, however, now sees less of an inflation overshoot, as the recently more solid pound curbs the upside pressure.
This aligns our out-of-consensus view of lower inflation better with the BoE projections (see the Wednesday’s Daily Wire). Although the BoE mentions that there are limits to the extent of an inflation overshoot it will tolerate, we believe that the lower inflation outlook opens the door the further BoE action against Brexit fallout, depending how severe it will hit the economy after the separation process is initiated next year.
The Bank of England hold will keep the pound sterling solid over the next months – we hence maintain our neutral 3-month outlook. However, later next year more action is possible, depending on the severity of the Brexit fallout. We stick to our bearish 12-months GBP outlook.
David A. Meier is economist at Julius Baer