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Edition August 6, 2018 - Crédit Agricole S.A.
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  • Edition August 6, 2018

    UK – Bank of England: On course for slow tightening despite Brexit uncertainty

    The BoE increased its key policy rate by 25bp to 0.75% at the August monetary policy meeting. Well flagged prior to the meeting, the move was largely anticipated by the markets. The vote was unanimous (9-0), contrary to expectations for a split vote. However, it is difficult to extract a clearly hawkish sign for future meetings. We continue to anticipate one rate hike per year, with the next rate hike expected in May 2019.

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  • Content:

    - BoE raises Bank rate to highest level since March 2009
    - Change in tone regarding the growth outlook
    - Neutral interest rate estimate at 2-3%
    - Implications for monetary policy

  • Extract:

    The vote was unanimous (9-0), contrary to expectations for a split vote. However, it is difficult to extract a clearly hawkish sign for future meetings.

    The BoE continues to expect growth of around 1.75% per year on average in 2019-2021 (above potential) and inflation above target over the forecast period. Forecasts were increased slightly, reflecting lower market expectations for the Bank rate path. The forward curve underpinning the BoE's new forecasts implies a little less than two rate hikes over the next three years.

    The BoE anticipates inflation slightly above the 2% target at the two-year horizon, implying a pace of tightening a touch faster than markets expect.

    The BoE published an official estimate of the equilibrium interest rate for the first time and explained its implications for the future path of the Bank rate. The BoE sees the equilibrium nominal interest rate in the long run at 2-3% (compared to a pre-crisis historical average of 5%).

  • UK: CPI inflation & MPC's projections*

    Inflation projections are 0.13ppt higher for the remainder part of this year and 0.20ppt higher for the first half of 2019. Hence, the BoE's inflation forecasts remain slightly above the 2% target through most of the forecast period (2.3% in Q418, 2.2% in Q419) and reach target only in the third year.

    UK: CPI inflation & MPC's projections*
  • Associative topics : Economics | Europe

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