BoE: Policy seen to stay on hold, with risk of a near-term cut – ABN AMRO

Bill Diviney, the senior economist at ABN AMRO, notes that the Bank of England (BoE) has kept interest rates at 0.75% since raising them twice by 25bp (in August 2018 and in November 2017).

• “Until relatively recently, the BoE looked to be comfortably on hold for the time being. However, a dovish shift on the MPC – notably by ex-hawk Michael Saunders – suggests a higher risk of a cut in the near-term.
• Accompanying Jonathan Haskell, Saunders dissented at the November meeting in favour of a 25bp cut, with both citing falling job vacancies as a sign that the labour market is turning. Vacancies have indeed fallen from historically elevated levels, as has employment, though the labour market overall remains strong – with wage growth and unit labour cost growth continuing to accelerate. Indeed, while inflation has fallen back of late, we expect higher ULC growth to drive a pickup in inflation next year.
• In the election meanwhile, both main parties are promising minimum wage hikes in the coming years, which should keep upward pressure on unit labour costs. It is possible that companies choose to cut jobs rather than raise prices in response to higher labour costs, but inflation expectations are relatively high in the UK, perhaps giving more leeway for businesses to pass on higher costs than in other advanced economies.”