Bank Rate may need to rise "a bit more", BoE says

Rate-setters at the Old Lady of Threadneedle Street stayed put on Thursday, reiterating that the path of Bank Rate going forwards would hinge on the exact form that Brexit took, although they did appear to tone down slightly their forecast for rate hikes.

Thus, on this occasion policymakers said interest rates would need to rise "a bit more" should a Brexit deal be struck, instead of repeating that they may need to rise by more than financial markets were anticipating.

On that note, in the August Inflation Report released alongside Thursday's policy decision, Bank marked down its projections for excess demand in the economy by the third quarter of 2020 from +0.25% and now envisaged excess supply of -0.25%.

Nonetheless, a weaker pound also saw rate-setters bump up their projections for growth and inflation.

"With Brexit uncertainty set to intensify, we think it is very unlikely the Bank will embark on the tightening that it is still loosely signalling in its statement," said ING developed markets economist James Smith.

"Equally though, we think it's too early to be pencilling in rate cuts, given the likelihood that wage growth will continue to perform solidly over coming months."

By a unanimous decision, the Monetary Policy Committee decided to all of the main policy settings unchanged, with Bank Rate steady at 0.75%, the size of the asset purchase facility for Gilts unchanged at £435.0bn and that for corporate bonds at £10.0bn.

"The monetary policy response to Brexit, whatever form it takes, will not be automatic and could be in either direction," the minutes of the MPC meeting said.

Should there be a Brexit deal, then interest rates would need to be raised "a bit more" in order to offset upwards pressures on prices over the next few years, Bank said, while also reiterating that any increases would "happen at a gradual pace and to a limited extent", and that "interest rates are likely to remain substantially lower than before the financial crisis."

If, on the contrary, there was a 'no deal' Brexit, then policymakers would need to balance upwards pressure on inflation from the likely depreciation in Sterling that would result and from companies' ability to supply good and services with the downwards pressure from any reduction in spending.

-- More to follow --