Is the Bank of England Too Optimistic?


The Bank of England’s Monetary Policy Committee surprised investors last week when three of its eight members voted for a 25 basis point increase in interest rates – a move that seems to ignore the heightened political and economic risk in the UK post-election says Darren Williams, Europe economist with AB in a note this week.

Motivated by a boost in inflation, employment growth, and a falling pound, the Bank is reasoning that a rate hike is warranted, a rationale that Williams cautions ignores the decline in regular pay growth to 1.7%, down from 2.6% at the end of last year, not to mention the tumultuous outcome of the UK election on June 8.

Despite the somewhat rosy outlook put forth by the Bank’s statement, Williams believes the economy is weakening and the election poses further risk for business investment and puts the UK consumer under increased pressure. “More importantly, though, there’s absolutely no evidence at the moment of second- round inflation effects. So we continue to expect the Bank to leave interest rates on hold—indeed, we still think that rate cuts could come onto the agenda later in the year if a combination of Brexit and rising domestic political uncertainty start to weigh more heavily on the economy,” writes Williams.