Bank of England likely to keep policy on hold until 2017

The Bank of England’s policy decision in February had witnessed Ian McCafferty abandon his lone call to hike rates against the backdrop of increased uncertainty regarding the global growth pace and a weaker prospect for headline inflation than expected earlier. The unanimous vote to keep rates unchanged at 0.5% was also seen in March. This highlights the MPC’s collective worries regarding the risks on the downside to inflation and activity in the medium term.

However, further reinforcement in global risk sentiment, domestic pay growth and energy prices might see a shift in Committee’s center of gravity with Martin Weale and McCafferty again voting for a hike in interest rate. However, this does not seem imminent. Admittedly, the recent commentary of the MPC implies that it is expected to refrain from hiking rates until at least 2017. But the current market expectation that the central bank will not tighten the policy until 2019 seems to be excessively dovish given the domestic economy’s underlying strength.

Actually, according to the central bank’s recent projections, inflation might exceed the target rate of 2% at both the two and three year forecast horizons. Subsequently the BoE is likely to hike rates in November 2017.