BoE likely to maintain guidance for gradually higher rates as long as Brexit has not been clarified, says DNB Markets

The Bank of England (BoE) is expected to ignore the macro trends and maintain the guidance for gradually higher rates as long as Brexit has not been clarified, according to the latest research report from DNB Markets.

The cyclical macro picture has continued to soften, particularly for the manufacturing and construction sectors. The much larger service sector seems to have stabilised for now. Manufacturing will likely continue to be hampered by weaker fundamentals in the eurozone and the ongoing trade war between the US and China.

The construction sector could slow further as real estate investments will likely be dragged down by continued Brexit uncertainty. While the worsening outlook may substantiate monetary easing, inflation close to target and a marked rise in wage growth points to higher interest rates.

Hence, it is reasonable that the BoE maintains the cautiously tightening bias, indicating a need for somewhat higher rates. As the outlook is strongly dependent on the Brexit outcome (ie. soft, hard or no Brexit), it seems wise to abstain from new signals as long as the there is no clarification yet, the report added.

In August last year, the Bank Rate was lifted from 0.50 percent to 0.75 percent and the BoE has since guided that future hikes “are likely to be at a gradual pace and to a limited extent”. In addition, the BoE has said that the policy response to the Brexit outcome could “be in either direction”.

With a still unclarified Brexit outlook, it is reasonable that the guidance remains unchanged at this meeting. At this stage the market is pricing in practically no movement in the Bank Rate until January next year, when there is priced in 72 percent probability of a 25bp cut.

"Our forecast of a 50bp rate cut in November was based on a no-deal Brexit taking place on October 31. This now seems unlikely as a majority in the Parliament voted in favour of a law which prevents such an outcome. In case of a soft Brexit on 31 October or a delay until January, the Bank Rate will likely be kept unchanged until next year," DNB Markets further commented in the report.