BoE to raise rates twice per year in 2018 and 2019 - Nomura

Analysts at Nomura expect the BoE to raise rates twice per year in 2018 and 2019, timed to coincide with its May and November Inflation Reports.

Key Quotes

“This is justified by a) the degree to which the Bank’s inflation forecasts from its February Inflation Report overshoot its target assuming unchanged monetary policy (i.e. around 45bp), and b) our view of the Bank’s transmission mechanism of monetary policy to inflation.”

“When it comes to the timing of its balance sheet wind-down, in the first instance we expect the MPC to sanction passive roll-off of Gilt ownership – i.e. not reinvesting redeeming Gilts – from 2020 onwards, when Bank Rate reaches 1.50% (which itself is earlier than the 2% Bank Rate-level guidance provided by the MPC two and a half years ago).”

“We take a look at the redemption profile of the BoE’s Gilt portfolio and argue that the Bank, in a similar vein to the Fed’s current wind-down programme, could announce a planned target amount of balance sheet reduction per year – say £25bn. Note that with Gilts issued on a fiscal-year basis it may be the case that the Bank will wish to announce fiscal- (rather than calendar-) year targets for QE reduction – or even monthly targets as the Fed has chosen to do.”

“In the Fed’s case, its planned roll-off is subject to a “cap”, meaning that its wind-down will be no more than redemptions in any one month. Should the BoE opt for a “target” then in some years it will be required to continue reinvesting a portion of redemptions, whereas in other years it would need to supplement passive roll-off with active secondary market Gilt sales. It remains to be seen whether the Bank chooses a target or a cap for sales when the time comes.”