James Knightley, Senior Economist at ING, suggests that while the UK economy is described as resilient, the BoE cite external worries, plunging commodity prices and financial market turbulence as factors that will restrain inflation. Key Quotes “The Bank of England left Bank Rate unchanged in a unanimous decision last week with Ian McCafferty no longer voting for a 25bp rate rise. The minutes and the Inflation Report placed significant emphasis on the recent financial market turmoil and the concerns about an external demand slowdown, particularly in emerging markets. The plunge in commodity prices and the fact wages have not risen as quickly as anticipated meant that inflation “is likely to remain below 1% until the end of the year” according to the Bank. Indeed, it was this disappointment on wages that led to McCafferty changing his call. There had been some talk ahead of the meeting that BoE Chief Economist Andy Haldane could potentially vote for a rate cut given his dovish rhetoric. However, when BoE Governor Mark Carney was questioned whether he still felt that the next move in rates would be upwards (given that markets were pricing in a 30% chance of a cut this year), he confirmed that he did and that the “whole MPC stands behind that”. We only see a rate cut happening if the UK votes to leave the EU, as we outlined in our recent brexit report. Domestically, the BoE remain relatively upbeat on the growth story, but steer clear of mentioning the Brexit referendum directly, which we think will weigh on growth. Consequently, given the lack of clarity on the near-term outlook it is no surprise to see the Bank want to keep policy steady until the situation stabilises. However, the Inflation Report projections suggest that based on steady monetary policy, inflation is likely to move above the 2% target on both a 2Y and 3Y horizon (2.27% and 2.51%, respectively). We think the weakness in sterling could contribute to even higher inflation readings. Currently, financial markets aren’t pricing in a move by the Bank of England until 2018. Should Chinese stimulus efforts yield some results in the second half of the year (which is our house view), financial markets stabilise and the UK votes to remain in the EU then we are likely to see financial markets dramatically re-price the outlook for monetary policy. However, there are lots of things that could go wrong between then and now, which would necessitate us changing our November 2016 rate hike call.” For more information, read our latest forex news.