‘The consumer is key’: Thoughts on what the BoE will do next

The Bank of England delivered a surprising note of hawkishness in its latest assessment of the UK economy. Here are a few thoughts from analysts on what will happen next.

Citi thinks the next steps hang in the balance:

If there was no Brexit uncertainty, probably more MPC members than just Kristin Forbes would be considering a rate hike. However, we continue to think that the MPC majority expects the Brexit process to cause a significant economic slowdown eventually and that the bar for raising interest rates is high.

All eyes will remain on the consumer. If the current signs of a slowdown in spending are corroborated, including by declining consumer confidence, the MPC will probably remain on hold until after the Article 50 negotiations are completed in 2019.

If the retail sales growth slowdown proves to be a blip and forecasts get revised up again, a clear hawkish signal could ‎already emerge with the May Inflation Report. Indeed, the minutes reveal that “some members noted that it would take relatively little further upside news on the prospects for activity and inflation for them to consider a more immediate reduction in policy support”.

Meanwhile, Fathom Consulting thinks the BoE is too optimistic:

Our own view is that consumption will slow at a faster pace than anticipated by the Bank, and that this will allow a majority of the Committee to look through a period of above-target inflation, which we see entering letter-writing territory later this year.

But Berenberg thinks the hawks will grow bolder:

There was a notable shift in the guidance for future policy amid continued strong growth and rising inflation.

As our base case, we look for a 25bp first rate hike in Q2 2018, with a 30% chance the BoE raises the bank rate earlier.‎ After the first hike, the BoE will likely continue to proceed with extra caution, with small and infrequent rate hikes signalled far in advance, and with a strong bias toward remaining in neutral as and when risks to growth surface.