5th November 2015
Anna Stupnytska, global economist at Fidelity International, comments on today’s Bank of England inflation report…
The Bank of England turned increasingly dovish on Thursday’s meeting relative to its stance at preceding meetings, which seems to have surprised the markets.
The reasons for this caution included the recent tightening in financial conditions, currency strength and its effects on inflation in particular, as well as global risks emanating from China and emerging markets.
This reasoning is very similar to that used by the Fed to explain their recent decisions to keep rates on hold for the time being.
Indeed both UK and US economies are facing similar headwinds, but being a much more open economy, the UK is more exposed to external shocks.
This shift in BOE’s stance should come as no surprise, bringing their views more in line with reality.
As the Fed prepares to hike rates for the first time possibly as soon as December, the Bank should be more comfortable in following suit sometime next year, provided the growth picture does not deteriorate dramatically.
But together with persistence of emerging markets – and currency-related headwinds, 2016 will bring new challenges for the UK, including fiscal tightening and uncertainty about the European Union referendum. This means that once the first hike is out of the way, the pace thereafter is likely to be extremely slow. The Bank will have to continue treading with caution.