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Bank of England review: Dovish hold but we still expect a cut later this year – Danske Bank

"Against our expectation of a rate cut, the Bank of England announced the Bank Rate remains unchanged at 0.75% (vote count 7-2 unchanged)," said Danske Bank analysts.

Key quotes

"Overall, we think today's decision was a dovish hold. The BoE repeated that 'policy may need to reinforce the expected recovery in UK GDP growth ', definitely keeping the door open for a rate cut later this year. BoE governor Mark Carney said that it is important for hard data to follow the soft survey indicators and it was written in the minutes that the BoE will 'monitor closely the extent to which these early indications of an improved outlook are sustained '."

"As we have a more pessimistic view on the UK economic outlook, we expect the Bank of England to cut the Bank Rate by 25bp later this year, probably in May. Historically, the Bank of England has been reluctant to make policy changes at interim meetings. We do not think that the rebound in business optimism is robust. We recognise that short-term Brexit uncertainty has fallen significantly, as we now know that the UK is leaving the EU tomorrow, Friday 31 January."

"Looking at the Bank of England's economic projections, they are based on a rate cut to 0.50% (they are based on market pricing ahead of the policy meeting). Still, CPI inflation is not expected to reach 2% before Q4 21 and GDP growth will remain below 1.5% until 2022. To be precise, the BoE expects Q1 GDP growth to rebound to 0.2% q/q. Even if we are wrong about the prospect of a rate cut, a rate hike is far away based on these projections. We think the current market pricing is fine at the moment."

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