Halister News

(Bloomberg) -- BOE will probably maintain its recent approach and tolerate an additional inflation overshoot due to further sterling weakness, Goldman Sachs economist Andrew Benito says in client note.

• Still, it faces a bigger policy challenge if, rather than a one-off ’cost shock’ from a weaker currency, the recent falls in sterling and quite contained pick-up in inflation expectations represent a loss of its policy credibility
• If the questioning of policy credibility goes far enough, and demand doesn’t weaken by much, BOE would need to raise bank rate, at the expense of the near-term outlook for domestic demand and U.K. employment
• Goldman’s view is that BOE’s policy credibility remains intact, that sterling has weakened for fundamental reasons and that, as GDP growth slows, BOE will ease policy, through a “mini rate cut” to 0.1% in February and additional asset purchases in the course of 2017
  • At the current juncture, BOE needs to be seen to be cautious and this means not acting as pre-emptively as it signaled in August
• NOTE: U.K. Inflation Rate Surges to Highest Since 2014: Chart