Citi sticks out with Q2 2017 Bank of England UK rate hike call

November 30, 2015

UK inflation expectations are slipping again, and so has Citi’s forecast for UK rates — rather dramatically.

Undaunted by signs that the Bank of England may be more keen to raise rates next year than the wide interpretation of the BoE’s latest forecasts would suggest, Citi’s chief European Economist Michael Saunders is now forecasting the first UK rate rise to take place in the second quarter of 2017 – more than a year off.

The consensus view from economists polled by Reuters last week puts Bank Rate already at 1 percent in the fourth quarter of 2016, at least four months earlier. The first rate hike is expected in Q2 2016 – a year earlier than Citi is now forecasting. There was no economist in the latest poll published last week who did not forecast at least one rate hike by the end of March 2017.

When you take into consideration that not long ago the debate was over which central bank would go first — the U.S. Federal Reserve, which is widely tipped to raise rates in a couple of weeks, or the BoE — this is an extremely dovish view on rates.

This new view coincides with Citi/YouGov’s latest survey of inflation expectations among the British public. Those have slipped to 1.4 percent for the year ahead and just 2.6 percent over the long run, matching a record low hit earlier this year.

UK inflation expectations

Saunders wrote in a note:

“The subdued level of inflation expectations in the UK may be a factor in the repeated downside surprises in average earnings growth which is running at about 2½% YoY (versus the precrisis average of roughly 4.0% YoY), even though the jobless rate is down to 5.3% (close to the pre-crisis average). All this helps create a self-reinforcing circle in which the very low headline inflation rates of 2014-15 increase the prospect of further low-flation in 2016-17 (reinforced, of course, by the disinflationary impact of sterling’s FX appreciation and increased labour supply). In turn, this points to a further extended period of low interest rates.”

Citi has exceptionally weak forecasts for UK inflation, expecting it to average just 0.8 percent next year and only 1.1 percent in 2017. Both are well below the latest Reuters poll median forecasts, which put inflation at 1.3 percent next year and at 2.0 percent in 2017, right on target.

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