BoE: Dovish message – Nordea

Morten Lund, analyst at Nordea Markets, suggests that the Bank of England stroke a more dovish tone at the September meeting, implying that persistent Brexit uncertainty could dampen demand and inflation, leading to lower interest rates.

Key Quotes

“In line with both our view and all economists asked in Bloomberg’s survey, the Bank of England (BoE) kept both the Bank Rate and the bond purchase programme unchanged. The decision was unanimous (9-0). The overall message was, in our opinion, to the dovish side.”

“Growth is now expected to be 0.2% q/q in Q3 compared to 0.3% projected in the August Inflation Report. Furthermore, the Bank of England stressed that if Brexit uncertainty would persist - particularly in an environment of weaker global growth - the more likely it is that demand growth will remain below potential and thereby increase excess supply. Hence, domestically generated inflationary pressures would be reduced. This stands in contrasts with what has otherwise been the message from the recent very high wage prints of 4.0% y/y which were the highest in 11 years and well above the 3.5% that is considered consistent with headline inflation of 2% in the medium-term. Finally, the BoE also hinted that some leading indicators were pointing towards a softening in the labour market.”

“Overall, the bleaker outlook of both the labour market, inflation and growth is in line with our view. An interesting take on today’s message is also that if we were to see several extensions of the Brexit deadline, the Bank of England could be ready to cut rates to support demand.”