investment viewpoints
“Bank of England – Back to its Inflation Targeting Roots?”
As expected, the Monetary Policy Committee (‘MPC’) of the Bank of England kept its policy rate at 0.25% by a vote of 7-2 and the other parameters of monetary policy unchanged. However, the tone of the Bank of England’s communication was on the hawkish side. Members of the MPC acknowledged that growth was slightly faster than expected in the August Inflation Report. As such, a majority of MPC members judged that further reduction in the amount of slack in the economy and a rise in inflationary pressure would require some withdrawal of monetary stimulus over the coming months. Moreover, the MPC also reiterated its view that markets are currently not pricing in enough rate hikes in the forecast period.
We believe that continued weak productivity and potential growth means that excess capacity could continue to be reduced rapidly if growth continues at this current robust pace, generating inflationary pressures. While the MPC continues to attribute the current increase in core inflation to the depreciation of GBP, we note that the currency has depreciated by less than 5% over the past six months. This suggests that the increase in core inflation may not be fully attributable to higher import costs but to domestic inflationary pressures, unless the lag impact of the pass-through is more than 12 months.
With this in mind, if growth remains strong, which is likely based on the current business survey readings, and inflation continues to accelerate, we would not be surprised if the Bank of England increased its policy rate before the end of 2017. Therefore, we see further scope for market repricing. In terms of timing, the release of the Inflation Report at the November meeting provides a good opportunity for the Bank of England to act at that time, if current conditions continue to remain in place.
important information.
This document has been prepared by Lombard Odier Funds (Europe) S.A. and is issued by Lombard Odier Asset Management (Europe) Limited, authorised and regulated by the Financial Conduct Authority (the “FCA”), and entered on the FCA register with registration number 515393. This material is provided for information purposes only and does not constitute an offer or a recommendation to purchase or sell any security or service. It is not intended for distribution, publication, or use in any jurisdiction where such distribution, publication, or use would be unlawful. This material does not contain personalized recommendations or advice and is not intended to substitute any professional advice on investment in financial products. Before entering into any transaction, an investor should consider carefully the suitability of a transaction to his/her particular circumstances and, where necessary, obtain independent professional advice in respect of risks, as well as any legal, regulatory, credit, tax, and accounting consequences. Past performance is no guarantee of current or future returns. This material is the property of LOIM and is addressed to its recipient exclusively for their personal use. It may not be reproduced (in whole or in part), transmitted, modified, or used for any other purpose without the prior written permission of LOIM. This material contains the opinions of LOIM, as at the date of issue.
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