5 Jun 2015
UK interest rates: Money market remains in favour of a July 2016 hike – Rabobank
FXStreet (Barcelona) - Jane Foley, Senior FX Strategist at Rabobank, reviews the BoE MPC policy decision and the interest rate hike expectations in the market.
Key Quotes
“The latest round of MPC meetings which policy decision have provided policy-makers with the opportunity of piecing together both the head and tailwinds that are currently impacting the UK economy. Although the minutes of this meeting will not be published until June 17 these will provide a clue as to whether there has been any change in tempo at the BoE.”
“For some months, two MPC members have regarded the decision to keep policy on hold as ‘finely balanced’. By the end of this year, the Bank expects CPI inflation to be rising as base effects connected with the drop in the oil price start to fall out of the index. The hawks have been stressing the need to look through the dip in inflation as a temporary phenomena and are of the view that domestic demand will be underpinned by the increase in real incomes stimulated by the lower prices of energy.”
“The doves, however, will be worried about political uncertainty ahead of the UK’s EU membership referendum and by concerns about fiscal austerity.”
“In the presentation of the May Inflation Report, Governor Carney cited austerity as an ongoing headwind to UK growth. The lower growth projections which were then announced by the Governor were based on the budget decisions that had already been outlined by the government.”
“In July Chancellor Osborne is due to outline a new budget. Without the influence of the more left leaning Lib-Democrats, the new majority Conservative government has hinted that austerity could be front-loaded. Either way another GBP 12 bln of welfare cuts are expected to be enacted during the term of the current parliament. The risk is that austerity could provide a renewed risk to growth.”
“In our view, the BoE are unlikely to hike interest rates before May 2016. Following the recent disappointments with key UK economic releases, the money market is not fully priced for a policy move until July 2016. While sterling remains sensitive to UK data releases, it remains the case that a hike from the BoE is still likely to come at a time when the ECB is still pursuing its QE policy.”
Key Quotes
“The latest round of MPC meetings which policy decision have provided policy-makers with the opportunity of piecing together both the head and tailwinds that are currently impacting the UK economy. Although the minutes of this meeting will not be published until June 17 these will provide a clue as to whether there has been any change in tempo at the BoE.”
“For some months, two MPC members have regarded the decision to keep policy on hold as ‘finely balanced’. By the end of this year, the Bank expects CPI inflation to be rising as base effects connected with the drop in the oil price start to fall out of the index. The hawks have been stressing the need to look through the dip in inflation as a temporary phenomena and are of the view that domestic demand will be underpinned by the increase in real incomes stimulated by the lower prices of energy.”
“The doves, however, will be worried about political uncertainty ahead of the UK’s EU membership referendum and by concerns about fiscal austerity.”
“In the presentation of the May Inflation Report, Governor Carney cited austerity as an ongoing headwind to UK growth. The lower growth projections which were then announced by the Governor were based on the budget decisions that had already been outlined by the government.”
“In July Chancellor Osborne is due to outline a new budget. Without the influence of the more left leaning Lib-Democrats, the new majority Conservative government has hinted that austerity could be front-loaded. Either way another GBP 12 bln of welfare cuts are expected to be enacted during the term of the current parliament. The risk is that austerity could provide a renewed risk to growth.”
“In our view, the BoE are unlikely to hike interest rates before May 2016. Following the recent disappointments with key UK economic releases, the money market is not fully priced for a policy move until July 2016. While sterling remains sensitive to UK data releases, it remains the case that a hike from the BoE is still likely to come at a time when the ECB is still pursuing its QE policy.”