BoE still expected to remain on hold during Brexit negotiations - Danske Bank

According to analysts from Danske Bank the Bank of England is still too optimistic on wage growth and hence underlying inflation, which is one of the reasons why they consider that it won’t raise interest rates soon. 

Key Quotes: 

“The Bank of England has lowered its GDP forecast both because it overestimated growth in H1 17 and because it has become more pessimistic in the short term. However, the BoE still expects growth to pick up next year, as business investments pick up and consumption recovers due to higher wage growth.”

“We still think the Bank of England is too optimistic on growth, as we do not think wage growth will pick up as fast as the BoE projects and think business investment growth will remain subdued.”

“We expect GDP growth to continue around 0.3% q/q in coming years, slightly below trend growth of 0.4%.  As we are more pessimistic on growth, we still expect the BoE to remain on hold until the Brexit negotiations are concluded in Spring 2019.”

“As expected, the CPI inflation forecast was broadly unchanged. CPI inflation is expected to stay above 2% in coming years, as it takes time for the weaker GBP and higher import prices to pass-through to consumer prices and because the Bank of England expects wage growth to pick up.”

“We think the BoE is still too optimistic on wage growth and hence underlying inflation, which is one of the reasons why we do not think the BoE will hike soon.  That said, higher wage growth remains one of the triggers for a more hawkish BoE.”