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BoE POLICY OUTLOOK There were no policy surprises at the 1st MPC meet of 2017. Rate setters left Bank rate/QE steady via unanimous 9-0 scores. There was no market dissent on the former, and the MPC concurred. The main thrust that some cottoned on to, but then was ignored, was the large number of BoE uncertainties. Some members were said to be closer to the limit of inflation tolerance (we already knew who the two hawkish-leaning members were, McCafferty and Forbes). The latter's views were vindicated by stellar and raised again 2017-18 GDP f/c. However, the more dovish and by inference the neutrals, saw a lower CPI trajectory.

In the February Quarterly Inflation report, inflation in 2 years is seen at 2.56% and peaking at 2.75%. Hence, this falls shy of a sensitive 3% - a level that the NIESR predicted only a few days ago with presumably STG's 5% rebound vs the Greenback accounted for. The BoE's other 'dovish' assumption - bases its market view for a 1st rate hike end-2018. We were bemused to hear that despite the growth/inflation outlooks, the BoE still has a symmetrical policy bias, i.e. it can cut or raise rates. A possible explanation for this, but not mentioned, Carney's 2014-15 misguided FG (forward guidance) that was calling for pre-emptive tightening.

Other metrics that are worth watching that could see the committee en masse change their tack are centred on employment and remuneration. The ILO unemployment rate is seen dropping to a new cyclical low 4.56%, despite that earnings will stay in the recent range, capped at/near 3%. This level, via inference is consistent with 0.25% Bank rate. We think this metric alignment relationship is borne out of short termism and is overly optimistic that it can endure. A more realistic explanation is ongoing Brexit uncertainty. It now looks obvious that the Bank has no compulsion to tighten policy until it learns more on the post divorce landscape - Carney stressed that the journey had only just started. Also noted, more slack in the economy than thought hitherto, next 3-year output gap 1% higher vs the November QIR. Despite this reactionary MPC stance, the curve looks too shallow and we maintain risk for the 10-year Gilt yield will eventually reflect rising inflation expectations, perhaps more aggressive steepening. In the aftermath, the doves had their moment, but we think a 1.50-1.75% range will be seen soon. AB


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