12 May 2014
Analyst roundup: Consensus is for BoE hike in the first half of 2015
FXStreet (London) - With UK consumer-price index inflation falling to 1.6 percent in March, calls for an earlier rate hike from the Bank of England have calmed. However, the inflation rate has likely bottomed out, with a rebound to the 2 percent area more likely in the coming prints. But as long as it remains constrained, the consensus seems to be that a rate hike will likely come in the first half of 2015.
Rabobank – Jane Foley, Senior Currency Strategist
Second quarter, 2015
Economists’ surveys point to the first BoE rate hike of the cycle in Q2 2015. This is in line with our long held view. Not so many months ago the consensus was pointing to Q3 2015 for the first BoE move and now there is a significant minority that favour Q1 for the initial hike. Not only that, but there are one or two warnings in the market about the risks of a move as soon as the end of this year.
Since we do not expect that the BoE will bring forward a rate hike, we see an associated risk that GBP bulls could at some point be disappointed. That said, as long as the USD is on the back foot we expect cable to find decent support. Also, given that the UK business cycle is more advanced than that of the Eurozone, we see a slow creep towards EUR/GBP on a 9-month view and continue to favour selling rallies in EUR/GBP.
J.P. Morgan Private Bank – Sara Yates, Global Head of FX Strategy
First quarter, 2015
Strong domestic data and an improving external sector make us now believe that the market’s expectation that rates will start to rise in Q1 2015 is appropriate. As a result of our now more optimistic perspective on the UK rates cycle relative to our Q2 Outlook, “Old Dogs, New Tricks” we believe there are upside risks to our 1y forecast of 1.60. The change also suggests GBP/USD downside is likely to have to wait for USD strength. We think this is unlikely in a sustainable fashion before H2. Until then, we think the level of GBP/USD will largely depend on next week’s Inflation Report.
Our base case is that the MPC confirms the market’s rate expectations and GBP/USD trades sideways for the next quarter. We think the main risk is that the MPC is more optimistic, prompting the market to forward its expectations and causing the short-term sideways range for GBP/USD to move higher. However, if the MPC focuses more on the downward trend in inflation, GBPUSD is likely to push down to 1.65. On EUR/GBP, we continue to think the risk is we see 0.80 before we see 0.84 again.
RBS - Ross Walker, Senior UK Economist
Easing inflation concerns weaken calls for early hike
In practice, we are sceptical that May will herald any significant shift in the MPC’s policy signalling – primarily because the latest Inflation Report forecasts seem unlikely to be revised in any major way. The market risks losing sight of the fact that the MPC has only one policy target (2 percent CPI inflation) and that the single most important policy signal is where it expects CPI inflation to be in 2-3 years’ time. Had CPI inflation continued to overshoot its target (it is currently at a 4½-year low of 1.6 percent) then the MPC would now be under huge pressure to deliver an early Bank Rate hike. Whatever the merits of an earlier rise, it would be a little odd if the current CPI undershoot and relatively benign near-term outlook prompted an abrupt hawkish shift from a central bank which has been prepared to look through much larger, more persistent inflation overshoots. The BoE’s reaction function changed – in a dovish direction – in response to the revisions to the MPC’s remit (made by the Chancellor in spring 2013) and Mark Carney’s arrival and the launch of ‘explicit forward guidance’ in summer 2013. We have yet to see any compelling evidence of a reversion.
Hence, we believe the policy signal in May will be shaped primarily by largely unrevised GDP and inflation forecasts, and not by some largely symbolic new ‘phase’ of policy guidance. After all, there was nothing to prevent any individual MPC member in previous months from deeming that one of their knock-outs had been breached and casting a dissenting vote. Part of the apparent expectation in some quarters that May will bring a more dramatic shift seems to stem from City ‘conspiracy theory’ views that dissent is being suppressed and air-brushed from the Minutes. We are in no position to say that this categorically not the case, but we do not see why any individual MPC member (especially an external member) would allow such a state of affairs to exist and why they would not go public in response.
TD – Richard Kelly, Head of European Rates and FX Research
First quarter, 2015
For the BoE, the policy response hinges on wages. Surveys suggest we could see wage growth accelerate from 1 percent to 4 percent in a year, the BoE says 2 percent, and we are somewhere in between. We have already seen a boost to wages in manufacturing and construction, so much will hinge on pass-through to the service sector. We continue to see the BoE hiking in 2015Q1, but have increased the tightening we expect from 50bps to 75bps in 2015. But the market is priced for more cumulative tightening through December 2016 than the BoE has delivered in every cycle but one over the last 20 years.
We’ve finally seen wage growth start ticking a little bit higher from its lows, but it has a long way to go before it finally climbs back to pre-recession levels. However, with UK survey data widely pointing to stronger wage growth, and given how quickly the unemployment rate continues to fall, we have every reason to think that wage growth will continue to trek higher through 2014. The BoE is expecting wage growth to pick up to about 2 percent year-on-year by the second half of the year, but we think that the risks here lie to the upside, and that we should see wage growth closer to the 2.5-3.0 percent range. There are several sectors that are typically more pro-cyclical but are still seeing much weaker wages than normal, although large fiscal deficits will likely keep public sector wages depressed.
Rabobank – Jane Foley, Senior Currency Strategist
Second quarter, 2015
Economists’ surveys point to the first BoE rate hike of the cycle in Q2 2015. This is in line with our long held view. Not so many months ago the consensus was pointing to Q3 2015 for the first BoE move and now there is a significant minority that favour Q1 for the initial hike. Not only that, but there are one or two warnings in the market about the risks of a move as soon as the end of this year.
Since we do not expect that the BoE will bring forward a rate hike, we see an associated risk that GBP bulls could at some point be disappointed. That said, as long as the USD is on the back foot we expect cable to find decent support. Also, given that the UK business cycle is more advanced than that of the Eurozone, we see a slow creep towards EUR/GBP on a 9-month view and continue to favour selling rallies in EUR/GBP.
J.P. Morgan Private Bank – Sara Yates, Global Head of FX Strategy
First quarter, 2015
Strong domestic data and an improving external sector make us now believe that the market’s expectation that rates will start to rise in Q1 2015 is appropriate. As a result of our now more optimistic perspective on the UK rates cycle relative to our Q2 Outlook, “Old Dogs, New Tricks” we believe there are upside risks to our 1y forecast of 1.60. The change also suggests GBP/USD downside is likely to have to wait for USD strength. We think this is unlikely in a sustainable fashion before H2. Until then, we think the level of GBP/USD will largely depend on next week’s Inflation Report.
Our base case is that the MPC confirms the market’s rate expectations and GBP/USD trades sideways for the next quarter. We think the main risk is that the MPC is more optimistic, prompting the market to forward its expectations and causing the short-term sideways range for GBP/USD to move higher. However, if the MPC focuses more on the downward trend in inflation, GBPUSD is likely to push down to 1.65. On EUR/GBP, we continue to think the risk is we see 0.80 before we see 0.84 again.
RBS - Ross Walker, Senior UK Economist
Easing inflation concerns weaken calls for early hike
In practice, we are sceptical that May will herald any significant shift in the MPC’s policy signalling – primarily because the latest Inflation Report forecasts seem unlikely to be revised in any major way. The market risks losing sight of the fact that the MPC has only one policy target (2 percent CPI inflation) and that the single most important policy signal is where it expects CPI inflation to be in 2-3 years’ time. Had CPI inflation continued to overshoot its target (it is currently at a 4½-year low of 1.6 percent) then the MPC would now be under huge pressure to deliver an early Bank Rate hike. Whatever the merits of an earlier rise, it would be a little odd if the current CPI undershoot and relatively benign near-term outlook prompted an abrupt hawkish shift from a central bank which has been prepared to look through much larger, more persistent inflation overshoots. The BoE’s reaction function changed – in a dovish direction – in response to the revisions to the MPC’s remit (made by the Chancellor in spring 2013) and Mark Carney’s arrival and the launch of ‘explicit forward guidance’ in summer 2013. We have yet to see any compelling evidence of a reversion.
Hence, we believe the policy signal in May will be shaped primarily by largely unrevised GDP and inflation forecasts, and not by some largely symbolic new ‘phase’ of policy guidance. After all, there was nothing to prevent any individual MPC member in previous months from deeming that one of their knock-outs had been breached and casting a dissenting vote. Part of the apparent expectation in some quarters that May will bring a more dramatic shift seems to stem from City ‘conspiracy theory’ views that dissent is being suppressed and air-brushed from the Minutes. We are in no position to say that this categorically not the case, but we do not see why any individual MPC member (especially an external member) would allow such a state of affairs to exist and why they would not go public in response.
TD – Richard Kelly, Head of European Rates and FX Research
First quarter, 2015
For the BoE, the policy response hinges on wages. Surveys suggest we could see wage growth accelerate from 1 percent to 4 percent in a year, the BoE says 2 percent, and we are somewhere in between. We have already seen a boost to wages in manufacturing and construction, so much will hinge on pass-through to the service sector. We continue to see the BoE hiking in 2015Q1, but have increased the tightening we expect from 50bps to 75bps in 2015. But the market is priced for more cumulative tightening through December 2016 than the BoE has delivered in every cycle but one over the last 20 years.
We’ve finally seen wage growth start ticking a little bit higher from its lows, but it has a long way to go before it finally climbs back to pre-recession levels. However, with UK survey data widely pointing to stronger wage growth, and given how quickly the unemployment rate continues to fall, we have every reason to think that wage growth will continue to trek higher through 2014. The BoE is expecting wage growth to pick up to about 2 percent year-on-year by the second half of the year, but we think that the risks here lie to the upside, and that we should see wage growth closer to the 2.5-3.0 percent range. There are several sectors that are typically more pro-cyclical but are still seeing much weaker wages than normal, although large fiscal deficits will likely keep public sector wages depressed.