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Fixed income
15 Jun 2017 | By Mark Nash

BoE follows Fed with hawkish surprise

The Bank of England’s (BoE) Monetary Policy Committee left rates unchanged at 0.25% at its June meeting, but surprised on the hawkish side with three of its eight members dissenting on the decision.

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The Bank of England’s (BoE) Monetary Policy Committee left rates unchanged at 0.25% at its June meeting, but surprised on the hawkish side with three of its eight members dissenting on the decision.

Michael Saunders and Ian McCafferty joined Kristin Forbes – the sole dissenter at the committee’s previous meeting – in voting for a rate hike. 

The committee expressed concern over inflation, which has risen at a faster-than-expected pace in recent months, and pointed out that slack in the labour market is continuing to decline. Despite recent weakness in economic data, the BoE is putting more emphasis on diminishing slack in the economy and retains the view that wages will pick up over its forecast period.

This stance has somewhat wrong-footed investors, who had focused more on the data pointing to weaker growth of late.

Interestingly, the decision comes just a day after hawkish behaviour from the US Federal Reserve also surprised markets: the central bank dismissed recent weak inflation figures as containing ‘one off’ factors, with Chair Janet Yellen also pointing to labour-market tightness as a key concern. Central bankers and the market appear to be out of sync, suggesting interesting times ahead.

The extreme uncertainty over the UK’s future trading relationship with the European Union will probably prevent rate hikes from taking place anytime soon, in our view. But with the government poised to dial down austerity and given the closing UK output gap, we expect the probability of rate increases to rise further down the line.

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