Bank of England sticks to its view and analysts, some defiantly, stick to theirs

May 14, 2014

Bank of England governor Mark Carney gestures during the bank's quarterly inflation report news conference at the Bank of England in LondonMark Carney has delivered what is probably the clearest message on the trajectory of interest rates from the Bank of England for a very long time.

There was no more  talk of “forward guidance”, but the guidance was pretty clear: no change to the view, on track for a first rate hike in a very gradual series, starting around a year from now. Nothing to see here.

There were a few grey areas, notably whether wage inflation will pick up significantly (it hasn’t yet) and if the elusive appearance of meaningful British productivity growth ever takes place (which will prevent the labour market from generating too much inflation).

And the jobless rate forecast was moved down a bit.

But so long as wage growth remains as tame as it was reported earlier in the day, there’s no inflation problem to see here.

So the message seems to be that if there ever were a time to drop speculation of an imminent rate rise, i.e., in the next six months, now would be the time.

Those forecasters who have been consistent in explaining why rates won’t likely rise until at least early next year — or perhaps not for a lot longer — appeared comfortable with their view.

Ross Walker, RBS (no BoE rate hikes on the horizon in forecast provided before May BoE rate meeting):

Overall, those market participants expecting a more marked ‘hawkish’ shift, perhaps in response to evidence of labour market tightening, will be disappointed. The MPC’s forecasts and the general tone of the Report suggest the BoE is minded to proceed cautiously and is reluctant to give any indication that it is minded to withdraw monetary policy stimulus in any pre-emptive fashion.

Alan Clarke, Scotiabank (rates rising in Q1, to 1.0 percent by end Q2 2015 in early May forecast):

It is clear that the first rate hike is on the horizon, but not right now. The Bank had to be measured today for two reasons: i.) If it was too hawkish then it would entertain speculation of a rate hike as soon as August and we don’t think the Bank wants that. A move in November is quite possible, but that is still 6 months away so it is too soon to start hinting in that direction right now. ii.) Given the backdrop of the ECB heading towards policy easing, had the Bank been explicitly hawkish, that would have threatened an abrupt increase in the GBP and gilt yields higher – dampening the outlook for growth and inflation.

Allan Monks, JP Morgan (first rise in Q1, to 1 percent by end-Q2 2015 in early May forecast)

With the softness in the pay data this morning, there is little in the data that is pushing the MPC into earlier action than it has indicated today.

We continue to look for pay to accelerate this year against a backdrop of continued growth. We expect the MPC to change its tone as this happens, and continue to see rates rising in 1Q . But both the tone of the inflation report and this morning’s labor market report have reduced the odds of rates moving higher later this year.

Simon Wells, HSBC (first rise in Q2 2015)

With no major amendments to its growth, inflation or productivity forecasts, this implies the Bank of England is happy to rubber stamp the current rate profile – which has the first hike coming through in Q2 2015 – as a good guide to future policy.

So, contrary to some press speculation, the MPC did not appear to be preparing the ground for policy to tighten earlier than that.

Sam Tombs, Capital Economics (no change in Bank Rate on forecast horizon in early May forecast):

The MPC’s dovish assessment suggests that interest rates are unlikely to rise within the next year. Indeed, subject to successful action to cool the housing market from the FPC, we continue to think that a combination of lower inflation and stronger productivity growth than the Committee currently expects will persuade it to keep interest rates on hold until the second half of next year, later than the markets and most economists expect.

Others are clinging to views that remain are completely at odds with what the BoE is saying.

Michael Saunders, Citi (four 25 basis point rate hikes through Q2 2015, starting in Q4 this year in early May forecast)

We continue to expect the first hike to come in Q4 this year, triggered by continued strong economic growth and further tightening in the labour market. Of course, the MPC could opt to delay slightly past then. But the longer the MPC leave rates ultra-low with slack shrinking rapidly, the more likely it will be that tightening – when it comes – will not be “gradual” and will not leave the eventual level of rates below the pre-crisis norm.

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