Bank of England inclined to further ease policy, likely to lower rate to 0.1 pct in November

In the past couple of week, anxiety about future U.K. central bank policy appears to have been the main driver of market sentiment, especially in the bond markets. For instance, the 10 year gilt yield reached a two-and-a-half month high of 0.95 percent before falling back, while the steepening yield curve in general might be partially related to positive domestic economic data, said Lloyds Bank in a research note.

There is possibility that it also shows recent disappointment with policy inaction from the European Central Bank and ongoing uncertainty regarding the future measures by the Bank of Japan. In recent weeks, certain officials of the U.S. Fed have also commented on the desire to hike rates with markets possibly fearing that it might be premature to hike. The weaker-than expected U.S. retail sales print for August and the headline measure declining 0.3 percent, strengthened the case for the next hike to be delayed until later in 2016, added Lloyds Bank.

The data releases in the U.K. were widely positive on current economic activity. Retail sales continued to be resilient, declining below projections in August by 0.2 percent month-on-month, whereas the July outturn was stronger than thought earlier after being revised upwards from 1.4 percent to 1.9 percent. The data for labor market also affirmed that employment continued to rise at a stronger pace in the three months to July, whereas the jobless rate remained at 4.9 percent.

Headline pay growth decelerated below expectations to 2.3 percent year-on-year, while CPI inflation remained at 0.6 percent year-on-year against expectations of a small increase. The effect of the data was overshadowed by the Bank of England that reiterated that it is still inclined to further ease policy, particularly as Bank Rate continues  to be in positive territory after keeping it on hold recently at 0.25 percent, stated Lloyds Bank.

There is still possibility for the Bank of England to cut policy rate further from the present level, unlike in Japan and the euro area. Even if the BoE acknowledged that the economic momentum in the near-term is slightly better than anticipated, it stated that the “contours of the economic outlook” had not altered. This suggests that there continue to be headwinds to the economic growth.

“Our central expectation is still for a further rate cut to 0.1 percent in November”, added Lloyds Bank.