The week ahead in Europe: UK policy meeting and EU IP in focus - Nomura

UK monetary policy meeting and euro area IP data are in focus this week, notes the Economics Team at Nomura. 

Key Quotes

UK Consumer prices (Tuesday): We forecast a small rise in CPI inflation from 2.6% to 2.7% in August thanks to expected rises in food and petrol prices. As the fall in mortgage interest rates a year ago drops out of the annual comparison, the wedge between RPI and CPI looks set to rise, which is why we expect a larger rise in RPI than CPI inflation from 3.6% to 3.8% in August (index level 274.4). We continue to expect CPI inflation to peak at 3% in Oct/Nov and RPI to peak at just over 4% in the same months.

UK Producer prices (Tuesday): A lower sterling (particularly against EUR) and a rise in crude oil prices between July and August suggest around a 1.5% m-o-m rise in input prices in the August PPI report. This would confirm a rise in the manufacturing PMI input price index during the month. As for output prices, still elevated price indicators in PMI and CBI surveys along with a rise in petrol prices during August point to increases of around 0.2%/0.3% m-o-m in core/headline prices, respectively.

Euro area industrial production (Wednesday): We expect euro area industrial production to increase 0.6% m-o-m in July, following a 0.6% m-o-m decrease in June. An outcome in line with our expectations would take July’s level of IP 0.7% above the average for Q2.

UK Labour market (Wednesday): Two indicators in particular will be in the spotlight in this report. First and foremost will be average earnings. The market focus is on headline annual growth, including and excluding bonuses, averaged over three months. If we were to assume that earnings grow by 0.2% m-o-m, then the ex-bonus 3m annual rate should remain unchanged at 2.1%, while the equivalent inc-bonus number should rise from 2.1% to 2.4% (thanks to a particularly weak April annual rate dropping out of the three-month comparison). Our preference is to focus on private-sector regular pay, which has grown by 1.3% over the past four months alone (4% annualised). The second focus is the unemployment rate, which at 4.4% is already below the BoE’s NAIRU estimate. We forecast unemployment to remain at 4.4% but see a possible further fall to 4.3%.

UK BoE policy announcement (Thursday): We continue to think that a modest 25bp rise in interest rates is not far away (November), as the Bank contemplates removing a small part of the additional emergency stimulus delivered just over a year ago. However, we doubt that anything will be changed at this month’s meeting. The MPC is back up to its full complement of nine members, with Sir Dave Ramsden joining as Deputy Governor with responsibility for markets and banking. We expect seven members to vote for rates on hold, with the two members voting for higher rates in August continuing to do so.