7 Jul 2014
BoE and rate outlook for Q2 2015 - Rabobank
FXStreet (Guatemala) - Jane Foley, Senior Currency Strategist at Rabobank noted that there is already a lot of good news priced into the pound.
Key Quotes:
“UK data releases from the third quarter of last year have revealed far more momentum behind the UK economic recovery than almost anyone had expected. This has culminated in widespread expectations that the BoE will be the second developed world central bank to hike rates this cycle, after the RBNZ. The latest survey from Reuters reveals that half of respondents now expect the first hike in the initial quarter of next year, with a decent minority looking for a move late this year”.
“Only a few weeks ago, the market consensus for the first BoE rate hike stood at Q2 2015, but confidence in this view was rattled by the remarks of BoE Governor Carney at the Mansion House on June 12. Carney commented that he was surprised by the relatively low probability that the market was attaching to the likelihood of a hike in the bank rate this year; the market consensus duly shifted”.
“The outlook for BoE rates, however, is not clear cut. As Carney remarked later in June, wage inflation in the UK remains surprising low. This would appear to suggest that there is more spare capacity in the labour market than the aggressive fall in the unemployment rate would suggest”.
“Not only is wage inflation still subdued but UK CPI inflation at 1.5% y/y is well below the BoE’s 2.0% target. Disinflation is a common theme across Europe currently and sterling strength will be contributing to downward pressure on UK import prices. For this reason we have left our forecast for the first BoE rate hike of the cycle at Q2 2015, at least for the time being. Not so many months ago, we were more hawkish than the market consensus, now we find ourselves in the dovish camp”.
Key Quotes:
“UK data releases from the third quarter of last year have revealed far more momentum behind the UK economic recovery than almost anyone had expected. This has culminated in widespread expectations that the BoE will be the second developed world central bank to hike rates this cycle, after the RBNZ. The latest survey from Reuters reveals that half of respondents now expect the first hike in the initial quarter of next year, with a decent minority looking for a move late this year”.
“Only a few weeks ago, the market consensus for the first BoE rate hike stood at Q2 2015, but confidence in this view was rattled by the remarks of BoE Governor Carney at the Mansion House on June 12. Carney commented that he was surprised by the relatively low probability that the market was attaching to the likelihood of a hike in the bank rate this year; the market consensus duly shifted”.
“The outlook for BoE rates, however, is not clear cut. As Carney remarked later in June, wage inflation in the UK remains surprising low. This would appear to suggest that there is more spare capacity in the labour market than the aggressive fall in the unemployment rate would suggest”.
“Not only is wage inflation still subdued but UK CPI inflation at 1.5% y/y is well below the BoE’s 2.0% target. Disinflation is a common theme across Europe currently and sterling strength will be contributing to downward pressure on UK import prices. For this reason we have left our forecast for the first BoE rate hike of the cycle at Q2 2015, at least for the time being. Not so many months ago, we were more hawkish than the market consensus, now we find ourselves in the dovish camp”.