BoE moving more hawkish? – ING

FXStreet (Barcelona) - James Knightley, Senior Economist at ING, explains that with the UK economy moving in the right direction, the Bank of England might raise rates before 2Q16 expectations.

Key Quotes

“At the May meeting, in the wake of the surprise General Election outcome, the Monetary Policy Committee voted unanimously to leave policy unchanged. Inflation was at zero and expected to turn negative (which it subsequently did) while the activity story was a little disappointing with 1Q GDP growth having come in at just 0.3% QoQ. At the same time, employment growth continues to move ahead strongly, but wage growth remained relatively weak. Nonetheless, for two MPC members “the immediate policy decision remained finely balanced between voting to hold or raise Bank Rate”.”

“The data since that meeting, we feel, may be enough to make these two members vote for a 25bp rate hike this week. Indeed, business surveys are pointing to stronger growth with the purchasing managers’ indices at levels consistent with above-trend GDP growth, industrial production has bounced back, retail sales have surged, and employment has increased substantially. There have even been some signs of life in the wages series while asset prices have continued to rise with equities at new highs and house prices and mortgage approvals pointing to rising demand.”

“Nonetheless, with headline CPI in negative territory and likely to remain well below the 2% target for a prolonged period given the strength of sterling and weakness in commodity prices, there is little need for imminent tightening. Consequently, it is possible that all nine members vote for “no change”, at least until they are confident that inflation has bottomed.”

“Still, with the UK economy moving in the right direction and rising wages set to boost medium-term inflation pressures we continue to feel that the Bank of England will raise rates before the 2Q16 time frame that markets are currently anticipating.”