Cautiously optimistic BoE catches markets off-guard - ING

James Smith, a Developed Markets economist at ING, notes that the Bank of England (BoE) opted against cutting interest rates at its latest meeting and the key question now for markets is whether this meeting closes the door to a rate cut at future meetings.

"Looking at the vote split, many investors may be questioning what all the fuss was about over the past few weeks. While two MPC members again voted for an immediate rate cut, the other two ‘external’ voters that had been mulling easing – Silvana Tenreyro and Jan Vlieghe - opted to keep rates on hold this time."

"Interestingly, the Bank has also removed the long-standing guidance that future rate hikes would be “limited and gradual”. While the debate over tightening is clearly some way off, this may nevertheless be taken as mildly hawkish by some in the market."

"Having said all of that, the lingering question of policy easing is unlikely to go away just yet. It all really hinges on whether the economy sees a Brexit bounce. If you look at the sentiment data, the answer appears to be tentative ‘yes’. From the PMIs to the Bank’s own surveys, optimism has reportedly increased and activity is showing signs of moving up a gear after December’s election.

And this appears to have been a key factor behind the BoE’s decision to keep rates on hold this month.

However, there are good reasons to be sceptical about the potential for a sharp turnaround in economic activity. Firstly, the sentiment data has given false indications at political turning points in the past – most notably after the Brexit referendum in 2016.

Secondly, and more importantly, there’s a risk that business optimism starts falling again as the reality of UK-EU trade negotiations hits. With an extension to the post-Brexit transition period looking unlikely, negotiations will have to move fast to generate a bare-bones free-trade agreement this year."