BoI held its base rate unchanged today at 0.10% for the fourth consecutive month, in line with expectations. BoI was considerably more dovish on inflation than previously, noting that during March-May inflation was consistent with the target, the first such statement of this kind.
Furthermore, the BoI notes that inflation expectations continue to be anchored inside the target. Staff forecasts have been updated, forecasting that inflation will accelerate from the current -0.4%y/y to 1.6% by mid-2016 and 2.0% at end-2016. This implies that the BoI is at the bottom of the cycle and will not likely be cut further. The housing market seems to be heating up again, supporting this view.
Offsetting this optimism were less than positive developments in growth and the exchange rate. Downward adjustments to Q1 15 real GDP and the weakness of exports raise some concerns over growth resiliency. BoI staff cut its 2015 forecast to 3.0% (from 3.2%), but improved its 2016 forecast to 3.7% (form 3.5%). Overall, the BoI retains its view that growth continues at a moderate rate.
"Overall, the statement and Governor Flug's press conference do not offer firm guidance as to what comes next. Relative to past statements, the BoI appears to have become more dovish, making another cut less likely, in our view. We retain our forecast that the BoI will remain on hold this year and begin hiking in Q1 16." says Barclays
