One Direction and the BOE

There's "One Direction (1D)" - the English-Irish pop music boy band -- and there's the Bank of England (BOE).

Like the big event of March - the US Federal Reserve lifted the fed funds rate by 25 basis points to 0.75% - 1.0% at its 15-16 March FOMC meeting - the BOE did what markets expected, it maintained current monetary policy settings - the Bank Rate at a record low of 0.25% and maintained the stock of purchased assets at £435 billion on the 16th of the same month.

But while there's only one direction for the Fed, i.e. up, the BOE's latest policy deliberations show a split is opening up with regards to the way forward.

The BOE's policy statement specifically named one of the nine members of the monetary policy committee (MPC) who dissented with the majority: "Kristin Forbes considered it appropriate to increase Bank Rate by 25 basis points". While Kristin is due to leave the BOE in June, Reuters reports that "some others said it would not take much for them to follow suit".

Looking at the UK's macro-economy, Kristin and the "some others" may have a point. The gloom and doom predicted before and straight after the Brexit vote on 23 June has, so far, not materialised.

On the contrary, the economy even strengthened. UK GDP expanded by 2.0% in the year to the December quarter, equal to the September quarter and stronger than June's 1.7% and March's 1.6% year-on-year growth rate.

The country's unemployment rate has dropped to 4.7% in the three months to January from 4.9% roundabout Brexit. The lead from the claimant count unemployment -- down another 11,300 for its third straight month of decline - points to further improvement in the jobless rate.

This is an indication that's further underscored by rising business confidence. The CBI business optimism index surged to a reading of +15 in the March quarter from -8 in the previous quarter and the Brexit-induced dive to -47 in the September quarter.

Inflation has ratcheted higher with the headline rate up by 1.8% in the year to January (from 0.5% in June last year) while the core rate has advanced to 1.6% from 1.4%.

The strength in domestic economic activity, along with the British pound's sharp depreciation - Sterling's effective exchange rate has dropped by 12.9% since Brexit on 23 June 2016 - would put upward pressure on inflation.

Were it not for the uncertainty that is Brexit, the BOE would have been on a path towards policy normalisation even before the Fed.

As such, the BOE sees risks in both directions.

"...if aggregate demand growth remains resilient, monetary policy may need to be tightened sooner and to a greater degree than that implied path. A more marked slowdown in activity than currently anticipated by the Committee, by contrast, could warrant additional policy support relative to that implied path.  Monetary policy can respond, in either direction, to changes to the economic outlook as they unfold to ensure a sustainable return of inflation to the 2% target."

Read more: BOEBrexitFedBank RateBank of EnglandCBIFOMCKristin ForbesReutersSterlingUK GDPUS Federal Reserve
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