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BoE POLICY OUTLOOK Policy is not the firm hold for ca 2 years as many/most thought prior to the Jun 15 meeting. Three dissenters (the most since May 2011) voted for an immediate 25 bp rate hike, instead of just one that was widely seen. Confirmation, if any was needed, that the emergency/lower bound 0.25% Bank rate won't be lowered, even on a hard Brexit. McCafferty and Saunders are likely to cast a similar vote in Aug, i.e the next convene, and with it being a 'super-meeting' (QIR, verdict and minutes) it could be nip and tuck for hawkish guidance, even if the vote is 5-2 for steady rates (fellow hawk Forbes has cast her final vote). The reaction was to immediately steepen what was a pancaked yield curve (STIRS dumped 12 ticks at worse) and the 10-year Gilt yield added 15 bp on a cumulative basis since the surprise, though was far too low (sub-1%) pre-release. These dynamics should warrant a further steepening in the curve to more familiar territory, ie 2/10 spread to ca 130 bps,

The macro rationale was somewhat more positive vs recent releases. Q1 GDP is expected to be revised up to 0.3% (looked suspect at the time) with further improvement in Q2, to 0.4% q/q. The MPC cited export surveys/investment intentions running above average, and acknowledged 'surprise' about low wages given historic norms. More inflation to come is a gimme, over 3% (already 2.9%) and a view that continued employment growth could suggest spare capacity and inflation tolerance is being eroded. In the prev QIR/mins combo (May), the policy makers said that tighter policy (vs current flat/shallow curve implies) was needed, but there was no explicit view on the timing. The Gov said Brexit didn't tie the MPC's hands. Our take: we have been hawks for arguably too long (vs market) and maintain a 'smooth' exit will transmit to quicker rate increases, and well before the 1st rate increase (per market, Q4 2019). Much remains dependent on inflation and confidence during the Brexit process and a transitory deal (to avoid the dreaded cliff edge) could allow the BoE leeway to start the slow normalisation process away from effective ZIRP. with CPI still well above target, albeit may have peaked in Q1 2018.

BANK RATE 0.25%, LAST MOVE -25 BP AUG 2016, NEXT MEET AUG 3 2017

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