The last Monetary Policy Committee (MPC) meeting saw a surprise shift in the plate tectonics among policymakers, with three of eight members voting for an increase in United Kingdom interest rates.
Reports since then for the start of the third quarter have been mixed, with manufacturing boosted by the best export order growth for more than seven years, while construction endured a shock slowdown in July.
In minutes from its latest meeting, the BoE said GDP "remains sluggish in the near-term as the squeeze on households' real incomes continues to weigh on consumption", as Britain gears up to exit the European Union against a backdrop of high domestic inflation.
'While the current picture remained one of an economy showing overall resilience in the face of concerns about the outlook, the subdued level of business optimism suggests it's likely that growth will at least remain modest and could easily weaken in coming months. Considering the BOE does not expect United Kingdom growth to rise above 2% for the entire forecast period, perhaps the FX market is right to test Carney and co's resolve to hike at all in 2018...
Inflation fell and is expected to peak around October.it is expected to remain a bit above target. Some will point to this as evidence that Brexit is taking its toll on the United Kingdom economy. Michael Saunders and Ian McCafferty voted again for a 25 basis point rate rise. Kristin Forbes, a hawk, has since been replaced with Silvana Tenreyro, who voted to hold the rate steady in Thursday's decision. Standing out was the considerable reduction in wage growth forecasts to 3.0% annually for 2018 from 3.5% just two months ago.
"In the short term, speculation on the dollar is very bearish, and based on the futures market, we're seeing the most negative view on it expressed since 2009", said Rui De Figueiredo, chief investment officer and co-head of the Solutions/Multi-Asset Group at Morgan Stanley Investment Management.
Combined with the corresponding strong manufacturing PMI and disappointing construction PMI this painted a relatively resilient picture of the United Kingdom economy, giving investors some cause for confidence. At the same time, increased domestic uncertainty was likely to act as a drag on investment, and there was a risk that this effect would be larger than had been assumed in the forecast'. In May, the BoE forecasted the economy will expand 1.9% in 2017, and inflation will increase to 2.7%. This autumn, it is time for the government to act as well, both to reinforce business confidence and encourage investment.
According to the Bank, wages will begin to rise faster than inflation in the second half of next year.