Some still say BoE rate hike to come sooner rather than later

November 11, 2015

carney.jpgThe consensus on when the Bank of England finally pulls the trigger and hikes interest rates from a record low 0.5 percent firmly settled on the second quarter of next year in the latest Reuters poll.

Although many economists were swayed after Britain’s central bank suggested last week it may wait much longer – and by markets not pricing any move in until the end of next year – others stuck to their guns.

In late October the consensus timing slipped back to the second quarter. Yet ten of the 43 participants in Tuesday’s poll still expect the Bank to hike rates earlier than then.

Simon Wells at HSBC wrote:

“While our rate call is now clearly a non-consensus view, we are not ready to abandon it. The macroeconomic case for a small rate rise is solid, despite current low levels of headline inflation. 
And with the Fed looking more likely to tighten in December following strong October payrolls data, the MPC has an opportunity to lift rates from the level they have been at since 2009. 

In our view, it should take it.”

Wells also said the lack of slack in the labour market and falling unemployment could bump up underlying inflationary pressures.

He may have a point – official data on Wednesday showed September unemployment was lower than expected, falling to 5.3 percent.

Kallum Pickering at Berenberg wrote after the data:

“It is becoming harder to justify keeping the policy rate at 0.5 percent.

The bottom line is this: both the labour market and the pace of GDP growth are showing mid-cycle characteristics – monetary policy doesn’t need to remain so accommodative for much longer.

In our view, the BoE will hike the policy rate in February by 25 basis points. Indeed, today’s data strengthen the view that the appropriate time is fast approaching.”

BoE poll - Nov

Still, what the central bank actually targets is inflation. It was negative in September and according to the BoE’s Inflation Report this month, it will only nudge slightly above its 2 percent target in two years.

Brian Hilliard at Societe Generale took the dovish Inflation Report, which he described as a damp squib, as a cue to push his forecast back to the fourth quarter:

“If the MPC were seriously trying to prepare the markets for a rate increase in Q1 2016 then it would have needed to markedly change the tone of its rhetoric to inject a note of urgency into its comments.

In fact, it went in the other direction.”

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