Will today see the return of the doves?

Today’s Bank of England meeting will be closely watched for signs that the hawkish caucus, which seemed so rampant last time, has had its wings clipped says Chris Beauchamp, chief market analyst at IG.

Will today see the return of the doves?

The last Monetary Policy Committee (MPC) meeting saw a surprise shift in the plate tectonics among policymakers, with three of eight members voting for an increase in UK interest rates. That meeting, however, may be the hawks’ only hurrah for a long time yet. One of those voting for higher rates, Kristin Forbes, has now left the Committee, and her replacement, Silvana Tenreyro, is likely to be a dove, having voiced her concerns about a balance between growing inflation and weaker output growth. Thus the balance is likely to shift back to 6-2, from 5-3.

Since then, Mark Carney, the Bank of England’s (BoE) governor, has become more hawkish, with his comments at the recent central bank conference in Sintra being viewed as making him more amenable towards tightening policy.

UK inflation dipped in June, according to data from the Office for National Statistics (ONS), falling to 2.6% from 2.9% in May, and breaking a sustained series of increases that had run since November 2016. Thus one area of concern has perhaps lessened somewhat, with worries about excessive price growth and a potential wage squeeze alleviated by news that core consumer price index (CPI), which excludes food and energy prices, also weakened, back to its April level of 2.4% from 2.6% in May.

But overhanging all this is Brexit, the issue that won’t go away for a very long time. Deutsche Bank has argued that the BoE will not tighten monetary policy until the uncertainties surrounding Brexit (and there are many) have been reduced. The bank argues that even if the hawks did manage to push the Committee further towards another rate hike, it would only see one rate increase before the end of the year as the economy is not strong enough to tolerate more.

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