MPC votes unanimously to keep policy on hold

Policymakers at the Old Lady on Threadneedle Street voted unanimously on Thursday to keep policy unchanged.

Bank Rate was kept at 0.75%, the size of the asset purchase facility for Gilts at £435bn, and that for corporate bond purchases at £10bn.

However, even as they continued to guide towards rate hikes coming at "a gradual pace and to a limited extent", presumably in the near-term, looking further out over the next three years they simultaneously pointed towards the need for a faster pace of hikes than currently anticipated by financial markets.

BoE Governor Mark Carney drove that point home during the press conference following Thursday's decision on rates, saying: "If something broadly like this forecast comes to pass [...] it will require interest rate increases over that period and it will require more, and more frequent interest rate increases, than the market currently expects."

The Monetary Policy Committee repeated its mantra that it continued to work under the assumption of a "smooth" adjustment to the average of a range of possible outcomes for the UK's eventual trading relationship with the European Union.

Significantly, reflecting current market pricing, its forecasts now reflected a slightly shallower glide path for Bank Rate to around 1.0% by the end of the forecast period, which was lower than that expected at the time of the February Inflation Report.

"As with UK financial conditions more generally, that path has been heavily influenced by recent global developments, with forward interest rates in the United States and the euro area falling markedly," the BoE said.

Partly because of that, by the end of the forecast period, in the second quarter of 2022, rate-setters now anticipated that excess demand would rise to 1% above potential output, helped by the lower market interest rates and easier financial conditions, which was "notably higher" than anticipated in February.

And consumer price inflation was expected to pick up to above Bank's 2.0% target in two years' time and would still be rising at the end of the three-year forecast period.

But in any case, the economic outlook continued to hinge on the exact form and timing of Brexit, the follow-on trading arrangements with the EU, whether the transition to them was "abrupt or smooth" and how financial markets and economic agents reacted.

"The appropriate path of monetary policy will depend on the balance of these effects on demand, supply and the exchange rate. The monetary policy response to Brexit, whatever form it takes, will not be automatic and could be in either direction. The Committee will always act to achieve the 2% inflation target."

Furthermore, the rate of advance in CPI was now forecast to slow from a 2.1% clip in the second quarter of 2019 to 1.7% in twelve months' time, the latter was down from its previous projection for a rate of 2.2%, although in two years' time CPI was seen above target at 2.1% and 2.2% in three years' time.

"The Committee passed up the opportunity to signal its intention to raise rates this year," analysts at RBC said, pointing out how the August and November MPC meetings were too close to the end-October Brexit deadline, which "probably precludes the MPC taking action at either."

RBC's forecast was for the next 25 basis point rate hike from the MPC to materialise in the spring of 2020.

Barclays Research was of a somewhat different view, judging the "tone" of the MPC meeting minutes "slightly more hawkish" than in February, pointing to Bank's own forecast for CPI to move above 2.0% over the course of 2020 as vindication of its views.

But unlike the MPC, analysts Fabrice Montagne and Sreekala Kochugovindan saw no reason to anticipate a "sudden" pick up in the economy in 2021, "[disputing] the bank's forecast of excess demand at that horizon".

Their forecast was for no hike in Bank Rate through the end of 2020.

"The bank's case for upwards sloping interest rate expectations rests on its growth forecasts in two to three years, which historically have proven systematically overoptimistic."