Central Bank Views

BOE Might Turn Less Divided after Weak Growth and Easing Inflation

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We expect BOE to leave the Bank rate unchanged at 0.25% and the asset purchase program at 435B pound at the upcoming meeting. The vote split might probably come in at 6-2 from 5-3 in June, as Silvana Tenreyro, successor of Kristin Forbes appears less hawkish and noted that the monetary policy decision would be data-dependent. Members favoring a rate hike were mainly hinged on the fact that inflation has been overshooting the central bank's target. However, there was a sign of slowdown on the consumer price level in June, offering room for policymakers to stand on the sideline amidst lackluster economic growth and wage, as well as uncertainty in Brexit negotiations.

UK GDP expanded +0.3%q/q in 2Q17, up from +0.2% in the first quarter, as driven by services, which grew +0.5% following a +0.1% growth in 1Q17. The largest contributors to growth in services were retail trade, which improved after a fall in the first quarter, and film production and distribution. Construction and manufacturing were the largest downward pulls on quarterly GDP growth, following 2 consecutive quarters of growth. Growth in the first half of the year markedly weakened from the same period last year. The Office for National Statistics called a "notable slowdown in the first half. It added, however, that "the economy is now 9% above its pre-downturn peak".

The job market continued to improve with total employment increasing +175K in the three months to May. The unemployment rate fell to 4.5%, the lowest since June 1975 during the period. However, wage growth disappointed with the three-month average real total pay dropping -0.7%, the fastest decline since August 2014, in May. The three-month average growth rate for regular pay, excluding bonuses, climbed modestly higher to +2% from +1.8% in April.

Overshooting the +2% inflation target has been a headache for the MPC and the key reasons for the hawks to propose a rate hike. However, signs of slowing price level were seen in June. Inflation rate fell to +2.6% y/y in June, from +2.9% in the prior month. The reading came in weaker than expectations, mainly due to falling petrol price.

Kristin Forbes, one of the three hawks, stepped down in June and is replaced by Silvana Tenreyro, who appears less hawkish than Forbes and has repeatedly warned about the negative effects of Brexit on growth. We expect her to vote for keeping the policy unchanged in August.