Bank of England: Cautious hold with upside risks – TD Securities

TD Securities’ macro team, led by Pooja Kumra, notes the Bank of England kept Bank Rate at 3.75% in a 6-3 vote, with a more hawkish tone versus July as inflation risks stay skewed higher. The report highlights revised GDP and inflation projections, geopolitical energy risks, and the possibility that further restrictive policy and a November or December rate hike may be required.

Policy hold but hawkish risk profile

"The BoE voted to leave Bank Rate unchanged at 3.75% in a 6-3 split, as expected, with governors Pill, Greene, and Mann dissenting for a hike. The messaging is more hawkish than in July, as inflation risks remain tilted to the upside (the BoE now sees inflation rising to 4% in 1Q27), "and more so than at the time of the July Monetary Policy Report," the Q3 GDP staff projection was revised higher from 0.1% to 0.4%, and the committee stands ready to act to avoid second-round impacts."

"Regarding individual members, Governor Bailey thinks the geopolitics of the situation makes the upside risk more prominent with a seeming loss of urgency to resolve the conflict. However, indirect energy passthrough has so far been weaker than the BoE had expected, and there continues to be very limited evidence of emerging second-round effects, though it is still early days. If the conflict in the Middle East persists for an extended period, as appears to be the case, and the risk of second-round effects emerging increases, it is likely that policy may have to tighten."

"The MPC July forecasts supported our call for the broader committee to view a policy hold as a means of staying restrictive. However, based on recent geopolitical risks and the emergence of potential energy shocks, we believe further restrictive policy may be required. There has been a visible shift from centrist members like Andrew Bailey, Ramsden and Lombardeli on not ruling out the need to tighten policy."

"The November meeting will bring updated forecasts as well as new information for the BoE on both demand and supply-side inflation developments. We see risks that if oil remains at current levels, a November or December rate hike cannot be ruled out."

(This article was created with the help of an Artificial Intelligence tool and reviewed by an editor. Know more.)