MacroScope

Bank of England Minutes give rate debate another twist

June 19, 2014

 

carney.jpgSpeculation about when the Bank of England hikes interest rates took a new twist on Wednesday after minutes from the June policy meeting struck a less hawkish tone than the Governor did in a speech late last week.

Mark Carney caused a few shockwaves last week when he said rates could rise sooner than expected, sending sterling above $1.70 to a near five-year high

It also led to newspaper headlines like “Carney delivers strongest hint yet that interest rates could rise before the end of the year” and “UK interest rates to rise this year and could peak at 5 percent“.

But the consensus from a Reuters poll on Friday for the first hike to come early next year may hold true.

Minutes from the June meeting were less hawkish, inflation staged a surprise drop in May, and UK pay growth is expected to stagnate until at least the end of next year.

The poll, taken after Carney’s speech, suggested the first move would only come in the first three months of next year, a quarter earlier than previously thought but still only a modest 25 basis point rise from the record low of 0.5 percent.

Indeed, only ten of the 45 economists polled on Friday expected a rise this year – although a couple have since changed their outlook.

Below are some recent comments from economists:

Michael Saunders, Citi
Carney’s comment last week that the first hike could happen sooner than markets currently expect looks like an attempt to dispel the popular myth that Carney is committed to keeping rates on hold until mid-2015 regardless of the data – and a warning that a majority for tightening on the MPC might come together soon if data justify – rather than a sign that the MPC is currently close to hiking.

 

Kevin Daly, Goldman Sachs
The Minutes indicate that last week’s speech by Governor Carney was motivated by concerns over a perceived lack of risk premium in front-end UK rates, rather than intended to send an unambiguous signal that a rise in Bank Rate is likely by year-end.

 

Alan Clarke, Scotiabank
Not the out and out hawkish report the market was braced for.
The point is that a hike before end year is not the no-brainer that the market was pricing in after Carney’s speech. They didn’t like a 15 percent chance of a pre-xmas hike being priced in, we doubt they like 100 percent chance of a November hike being priced in either.

 

Elizabeth Martins, HSBC
The minutes suggest to us that Mark Carney’s Mansion House comments were more about the market not pricing in sufficient risk, than hinting that the MPC’s central case for rates has changed.
Indeed, the central case may have moved less than the market assumes.

 

Philippe Gudin, Barclays
Rate hike approaching, but not imminent.
The minutes showed that the uncertainty about the margin and pace of absorption of labour market slack is still high, but more evidence of erosion of slack is needed before an increase in Bank Rate.

 

Azad Zangana, Schroders
It appears that the Bank of England is preparing markets for that first increase to take place before the general election. Schroders is bringing forward its forecast for the first interest rate increase to February 2015 on the back of the BOE’s mixed messages to markets.

 

Philip Shaw, Investec
Not yet a signpost to higher rates.
Critically the committee did not have last week’s labour market data available when it met, which showed a surge in employment of 345,000 over the latest three months, a drop in the unemployment rate to 6.6 percent as well as buoyant numbers for hours worked, vacancies and the labour participation rate.
Given that labour market metrics effectively determine the BoE’s assessment of the amount of ‘economic slack’, this report is a critical piece of the monetary policy jigsaw and may well have been the catalyst for Dr Carney’s unexpected comments last Thursday.

(Additional reporting by Sumanta Dey and Ross Finley)

 

 

 

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