In line with ours and market expectation, the Bank of England (BoE) raised the official policy rate by 25 basis points (bps) from 0.5% to 0.75%, the second hike in just under a decade that was largely supported by a strong labour market and credit growth. With the BoE sticking to its guidance that interest rates will continue to head higher, but only at gradual pace, we feel much will depend on whether the UK breaks up abruptly from the EU or otherwise.

In our view, as long as the UK does not exit abruptly from the EU, the BoE will be on track to deliver two rate hikes per year in 2019 and 2020. We expect the next rate hike to be in May 2019 after Brexit in March 2019 and should reach 1.75% by end-2020. The policy rate should normalise around 2.00%–3.00% and is unlikely to reach the previous 5.00% level. The impact on the pound turned negative despite the BoE’s hawkish rhetoric suggesting a brighter economic outlook. The pound fell to its lowest since July 20 simply because we believe it is tough on the BoE to convince that it may hike rates again without a Brexit deal. So it is unlikely that the MPC will be willing to hike rates again in the coming months. We expect the pound to remain vulnerable to political uncertainty and could end around 1.32–1.34 levels against the USD.

• In line with ours and market expectation, the Bank of England (BoE) raised the policy rate by 25 basis points (bps) from 0.5% to 0.75%. It is the second increase in just under a decade. The last rise was in November 2017 when the BoE lifted the policy rate by 25bps to 0.5%. The decision to raise rates was supported by a strong labour market and credit growth.

• During the meeting, the BoE cited that if its macroeconomic forecasts proved right, it would probably have to raise rates further but at a gradual pace. Inflation is forecast to hit 2.2% in 2019 and 2.1% in 2020, and GDP is forecasted to grow at a “modest” pace of 1.4% in 2018 and 1.8% in 2019. Unemployment rate should fall further from 4.2% with upwards pressure on wage growth being envisaged.

• Meanwhile, the BoE recognized during the meeting "that the economic outlook could be influenced significantly by the response of households, businesses and financial markets to developments related to the process of EU withdrawal".

• With the BoE sticking to its guidance that interest rates will continue to head higher, but only at gradual pace, we believe much will depend on whether the UK breaks up abruptly from the EU or otherwise. As long as the UK does not exit abruptly from the EU, the BoE will be on track to deliver two rate hikes per year in 2019 and 2020.

• We are looking at the next hike in May 2019 after Brexit in March 2019. The policy rate should reach 1.75% by end- 2020. The policy rate should normalise around 2.00%–3.00% and is unlikely to reach the previous 5.00% level.

• The impact on pound turned negative despite the BoE’s hawkish rhetoric suggesting a brighter economic outlook. The pound fell to its lowest since July 20 simply because we believe it is tough on the BoE to convince that it may hike rates again without a Brexit deal. So it is unlikely that the MPC will be willing to hike rates again in the coming months. We expect the pound to remain vulnerable to political uncertainty and could end around 1.32–1.34 levels against the USD.

Source: AmInvest Research - 3 Aug 2018