In line with our expectations, the Bank of England (BoE) made no policy changes at its March meeting and reiterated its neutral stance by repeating it could move 'in either direction'.
However, there was a hawkish twist. First, Kristin Forbes (a known hawk) voted for a March hike.Note, though, that she is leaving the BoE on 30 June 2017, which makes her hawkish stance less important. Second, the statement revealed that 'some members noted that it would take relatively little further upside news...for them to consider that a more immediate reduction in policy support might be warranted'.
Note that the BoE reaction function has changed since the financial crisis, so the BoE puts more weight on growth/unemployment relative to inflation. In our view, the BoE seems to be more worried about slower growth than too-high inflation if this is only temporary.
The market is now pricing in an accumulated 8bp rate hike from the BoE in 2017 and 26bp by the end of 2018. We still think the market's pricing is too hawkish, suggesting little support for GBP driven by higher UK interest rates ahead.
We still see risks skewed on the upside for EUR/GBP, as we expect GBP to underperform vis-à-vis the USD and EUR in coming weeks and following the triggering of Article 50.
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