As expected, the BoE kept the Bank Rate and stocks of purchased assets unchanged at 0.50% and GBP375bn, respectively. The vote was once again 8-1.
Although the pressure on the BoE to keep rates low eased significantly after the ECB disappointed last week, the BoE took another dovish stance at the December meeting as the lower oil price has lowered the inflation outlook for next year. The lower oil price is the main reason why we now expect the first BoE hike in Q2 16, probably in May (previously Q1 16, February). The risk picture is in our view balanced with on the one hand growth above trend and the labour market more or less back to 'normal' and on the other hand an uncertain outlook for commodity prices.
We expect the BoE to hike two times next year taking the Bank Rate to 1.0% by the end of next 2016.
We have revised our 3M EUR/GBP higher to 0.71 (previously 0.68) as GBP now should see less support from relative rates in the coming months. With the first BoE hike in Q2, we now forecast EUR/GBP to drop to 0.70 in 6M (previously 0.71).