BOE Deputy Gov Gieve gave a speech yesterday evening that can be described as slightly on the dovish side. This confirms that there is no consensus on the MPC to change policy in either direction for the foreseeable future. Gieve — who has announced he will leave the MPC next year — has taken a more dovish line than the average MPC member in recent months. He said that balancing the risk to growth vs. the international inflation pressure creates an enormous challenge for the Bank. If nothing else was going on, he said the economic slowdown would point to further rate cuts — but soaring commodity prices are pushing up inflation. The 3.3% rate of CPI inflation will make it difficult for the BoE to resume its easing path any time soon. Nevertheless, with a broad swathe of indicators pointing to a slowdown in activity — not least of which was the BoE’s own regional agents’ survey released earlier this week — a rate hike is difficult to envisage at this point. The economy may slow sufficiently during H2 to reduce inflation prospects. In contrast to the market’s discounting of a rate hike by the Sept MPC meeting, we believe that the 5% Bank rate will be held steady until being cut in Q4 or Q1-09.
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