Will the BoE will ‘look through’ higher inflation? – Standard Chartered

In view of the analysts at Standard Chartered, the BoE faces a dilemma between leaning against rising inflation expectations and cushioning the potential negative fallout from Brexit.

Key Quotes

“The Bank’s task was ostensibly made more difficult this week by stronger-than-expected February consumer price data (2.3% y/y, consensus: 1.7%). The CPI release followed hot on the heels of a slightly less dovish BoE policy statement and minutes. These developments have helped halt the slide in UK rate expectations relative to the US.” 

“We expect the BoE to resolve its dilemma by focusing on the hit to household real incomes from rising inflation. Indeed, the latest earnings data suggest that wage growth is slowing. Besides, historical precedent suggests that the BoE will ‘look through’ higher inflation and maintain monetary accommodation at current levels. The Bank has been here before: CPI inflation briefly breached 5% in 2008 and 2011. It remained on a monetary policy loosening path in both years. The BoE should also be encouraged by lower UK inflation breakevens, which have declined c.58bps (on a 5Y-5Y basis) since early February to 3.05%, echoing global trends.”