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21 May 2015
Expecting a BoE rate hike in Q1 2016 – Investec
FXStreet (Barcelona) - The Research Team at Investec expects pay growth and inflation to head towards the BoE’s target by early next year, hence forecasting a Q1 2016 UK rate hike.
Key Quotes
“As expected yesterday’s release of May’s MPC minutes showed that the committee was unanimous in voting for unchanged policy, both in terms of keeping the Bank rate steady at 0.5% and the asset purchase (QE) target on hold at £375bn.”
“Two members (likely McCafferty and Weale) once again considered the case for higher rates to be finely balanced. However a vote to hike the policy rate would have looked odd from a presentational perspective, coming a week or so before the news that CPI inflation had fallen into sub-zero territory.”
“The key points that came about from the discussion of the economic outlook included scepticism that the recovery is losing steam and that a rising proportion of low paid /less skilled jobs in the economy is putting downward pressure on the official measure of pay growth and is likely to continue to do so for a while.”
“Given the various uncertainties surrounding the BoE’s analysis and the economic outlook generally, it’s hardly surprising that neither the minutes nor the Inflation Report contained any obvious policy clues. For the majority of the committee to consider starting to normalise interest rates, a minimum number of conditions need to be in place, including the continued momentum of activity, firmer pay growth and clearer signs that inflation is heading towards the 2% target. These are not met at present, although we would argue that they probably will be by early next year. Indeed our forecasts show inflation will be back above 1% at this point, which would mean that the Governor will no longer be exchanging letters with Chancellor. Accordingly we are still looking for a Q1 2016 hike.”
Key Quotes
“As expected yesterday’s release of May’s MPC minutes showed that the committee was unanimous in voting for unchanged policy, both in terms of keeping the Bank rate steady at 0.5% and the asset purchase (QE) target on hold at £375bn.”
“Two members (likely McCafferty and Weale) once again considered the case for higher rates to be finely balanced. However a vote to hike the policy rate would have looked odd from a presentational perspective, coming a week or so before the news that CPI inflation had fallen into sub-zero territory.”
“The key points that came about from the discussion of the economic outlook included scepticism that the recovery is losing steam and that a rising proportion of low paid /less skilled jobs in the economy is putting downward pressure on the official measure of pay growth and is likely to continue to do so for a while.”
“Given the various uncertainties surrounding the BoE’s analysis and the economic outlook generally, it’s hardly surprising that neither the minutes nor the Inflation Report contained any obvious policy clues. For the majority of the committee to consider starting to normalise interest rates, a minimum number of conditions need to be in place, including the continued momentum of activity, firmer pay growth and clearer signs that inflation is heading towards the 2% target. These are not met at present, although we would argue that they probably will be by early next year. Indeed our forecasts show inflation will be back above 1% at this point, which would mean that the Governor will no longer be exchanging letters with Chancellor. Accordingly we are still looking for a Q1 2016 hike.”