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BOE Hike Warnings Go Unheeded as Rate Cuts Seen as More Likely

Bloomberg logoBloomberg 6/11/2019 David Goodman

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Bank of England policy makers and investors are taking contrasting views of the U.K. economy as official warnings of potential interest rate hikes clash with market predictions for a cut.

The market moves are partly based on a belief that the U.S. Federal Reserve is on course to reverse its recent hiking path, forcing central banks around the world to follow suit, but also reflect the drastically different Brexit outcome built into investors’ outlook.

a screenshot of a cell phone: Diverging Outlooks© Bloomberg Diverging Outlooks

While the BOE’s forecasts -- including its hawkish view of longer-term inflation -- are based on the assumption of a smooth Brexit process, investors have the luxury of being more nimble, and so have increasingly priced in the risk of a no-deal departure in October. That’s not without reason, since no deal is a policy advanced by a number of potential candidates to replace Theresa May as prime minister this summer.

There are also nascent signs that BOE officials are ending their year of unanimity, with some edging closer to the market’s view.

In the past few days, Michael Saunders indicated he thinks there’s no need to wait until all political uncertainty around is resolved before raising rates, while chief economist Andy Haldane said the time is nearing when a hike is needed to keep inflation pressures in check.

“It’s more to do with Brexit assumptions rather than a communications failure on our side,” Saunders said Tuesday, when asked about the diverging outlooks between policy makers and investors. “It may be quite reasonable for markets to take a different view of possible Brexit outcomes. We will go on trying to explain our views on the economic outlook as clearly as possible and the monetary policy implications of that.”

Read more: Carney’s 2017 jolt needed again if he’s serious about hiking

On the other side of the argument, Gertjan Vlieghe said global and domestic risks had intensified in the past month and the outlook “has got a little worse” since the BOE’s May forecast. Figures on Monday showed a larger-than-expected slowdown in growth in April, and the National Institute of Economic and Social Research predicts the economy is likely to contract 0.2% in the second quarter.

Departing the European Union without a deal would hamper the U.K.’s long-term growth prospects, Saunders told Parliament’s Treasury Committee on Tuesday. The nation would suffer from reduced openness to international trade and less appeal as a global business location.

An escalation in trade turmoil would also damage British exports, investment and asset prices, he said. Those sentiments were echoed by Deputy Governor Ben Broadbent, who in his own responses to the group said “a disorderly Brexit remains the most significant risk” to financial stability. Both have said that rates could go either way in the case of a no deal.

--With assistance from Lucy Meakin and Jill Ward.

To contact the reporter on this story: David Goodman in London at dgoodman28@bloomberg.net

To contact the editors responsible for this story: Paul Gordon at pgordon6@bloomberg.net, Brian Swint, Lucy Meakin

For more articles like this, please visit us at bloomberg.com

©2019 Bloomberg L.P.

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