5 Mar 2015
BoE’s might hike rates despite low inflation, August likely – Danske
FXStreet (Barcelona) - Mikael Olai Milhøj, Analyst at Danske Bank, explains that the BoE might hike rates in August, but risks also tilted towards a later hike in Q3 or Q4, but expects the central bank to hike irrespective of the inflation remaining low.
Key Quotes
“As expected, the Monetary Policy Committee (MPC) just announced that it voted to maintain the Bank Rate and the stock of asset purchases at 0.50% and GBP375bn, respectively.”
“We still expect the first hike to arrive in August but stress that risks are tilted towards a hike later in Q3 or possibly in Q4.”
“There are several reasons for our somewhat dovish view. Firstly, the UK recovery remains on track and we expect solid growth both this year and next, supported by the low commodity prices, positive real wage growth and increasing growth in Europe.”
“Secondly, the unemployment rate is currently at 5.7% and is approaching the Bank of England’s estimated medium-term equilibrium unemployment rate at 5.5%, implying that the slack in the labour market is diminishing. In the Inflation Report from February, the Bank of England estimated that slack is around 0.5% of GDP.”
“Thirdly, both wage growth and core inflation are increasing, implying no deflationary tendencies.”
“Fourthly, the MPC recognises that the very low inflation is due to temporary factors that should drop out at the end of this year, implying that inflation could increase sharply.”
“As the MPC recognises that monetary policy works with a lag, we expect it to hike despite low inflation if the medium-term outlook calls for a tighter monetary policy.”
Key Quotes
“As expected, the Monetary Policy Committee (MPC) just announced that it voted to maintain the Bank Rate and the stock of asset purchases at 0.50% and GBP375bn, respectively.”
“We still expect the first hike to arrive in August but stress that risks are tilted towards a hike later in Q3 or possibly in Q4.”
“There are several reasons for our somewhat dovish view. Firstly, the UK recovery remains on track and we expect solid growth both this year and next, supported by the low commodity prices, positive real wage growth and increasing growth in Europe.”
“Secondly, the unemployment rate is currently at 5.7% and is approaching the Bank of England’s estimated medium-term equilibrium unemployment rate at 5.5%, implying that the slack in the labour market is diminishing. In the Inflation Report from February, the Bank of England estimated that slack is around 0.5% of GDP.”
“Thirdly, both wage growth and core inflation are increasing, implying no deflationary tendencies.”
“Fourthly, the MPC recognises that the very low inflation is due to temporary factors that should drop out at the end of this year, implying that inflation could increase sharply.”
“As the MPC recognises that monetary policy works with a lag, we expect it to hike despite low inflation if the medium-term outlook calls for a tighter monetary policy.”