14th January 2016
David Page, senior economist at AXA Investment Managers comments on the Bank of England’s (BoE) Monetary Policy Committee (MPC) meeting this week and concludes that November 2016 is now the most likely time for the MPC’s first move…
The BoE left monetary policy on hold on Thursday as was fully expected. It voted 8-1 to do so.
Minutes were cautious following a torrid start to the year and reviewed the global risks as well as more direct implications from falling oil prices and trade-weighted sterling.
A modestly softer growth outlook and concerns about the domestic housing market sealed a downbeat assessment. However, references to medium-term inflation increases caused some reflection in markets, that now suggest a first rate hike around the middle of 2017.
Given the weaker inflation outlook, we are shifting our outlook for the first Bank Rate hike from the second quarter.
The precise timing will depend on the future path of commodities and sterling and the timing of the EU referendum.
We suggest November 2016 is now the most likely time for the MPC’s first move, reducing our expected hikes in 2016 to just 0.25% from 0.50%.
Bank Rate remained at 0.5% after Thursday’s meeting as it had since March 2009 and the Asset Purchase Facility (Quantitative Easing) target was unchanged at £375bn.
The minutes showed only one member dissenting, with Ian McCafferty again arguing for an immediate increase in Bank Rate.
The minutes struck a cautious tone following recent international developments. The minutes noted that there had been “muted” reaction to the Federal Reserve’s hike, but discussed the impact of declining Chinese equity markets and a re-focus on the Chinese yuan.
The MPC’s attention focused on the sharp declines in oil and the 3% fall in trade-weighted sterling compared with the 15-day moving average included in the November Inflation Report.
Both should be expected to boost activity over the longer-term, but the MPC was cautious to what extent it considered this likely. The MPC lowered its growth forecasts for Q4 2015 and Q1 2016, relative to November’s forecasts. It also anticipated a “dampening effect” on the housing market following the latest Budget announcements on buy-to-let properties.
The Committee considered the inflation outlook in the context of oil, sterling and wage developments. Oil moves were likely to “moderate the extent” inflation would rise in the coming months, but sterling would “add somewhat to imported cost pressures”.
The moderation in average earnings growth to year-end, relative to the pick-up to 3% around mid-year was also highlighted.
The minutes considered the prospect of weaker inflation expectations as potentially affecting wage growth.
It also considered the impact of falling average weekly hours. Despite signs of softer productivity growth having some impact, unit labour costs growth was considered modestly slower than in November.
The minutes stated inflation “could be expected to pick up materially further in H2 2016 and early 2017”.
In broad terms, the BoE faces a juggling act of weak short-term inflation – made weaker by the fall in oil and other commodity prices; and firmer medium-term inflation – made firmer by the 4.3% drop in trade-weighted sterling since the November Inflation Report.
Added to this is the uncertainty that will likely surround a Brexit referendum. Recent market moves have increased the likelihood of persistently low headline inflation that we think makes a rate rise in Q2 now unlikely. However, medium-term considerations should keep the Bank projecting inflation returning swiftly to target as commodity price base effects unwind.
This likely delays a rate hike into H2 2016, the precise timing of which will be additionally affected by the timing of an EU referendum. At this stage, we think referendum uncertainty is likely to persist over the summer and we now forecast the MPC to tighten monetary policy in November of this year. However, we warn that a swifter than anticipated rebound in oil, or early referendum could see this hike come sooner.
This remains ahead of the market consensus, which is now looking at a rate rise not until H2 2017. Financial market reaction: 2-year and 10-year yields rose around 4bp to 0.50% and 1.73% respectively. Sterling also rose to £0.756 (from £0.76) to the euro, but was only marginally higher to the US dollar at $1.44.