Rate Hike Likely Pushed Out Further
The Bank of England cut its inflation and growth forecasts for 2016, at the same time the European Commission cut its forecast for UK growth too. In December, twelve-month CPI inflation stood at 0.2%, almost 2 percentage points below the inflation target, putting the central bank in a bit of a bind. In its summary statement, the BoE acknowledged that a return to its 2 percent inflation target “requires balancing the protracted drags from sterling’s past appreciation and low growth in world export prices against increases in domestic cost growth,” but decided that “fully offsetting the drag on inflation from external factors over the short run would…involve too rapid an acceleration in domestic costs.” With wage growth weaker than anticipated (four-quarter pay growth was 2 percent in the three months to November), the BoE trimmed its inflation forecast by 0.3 percentage points for Q1 2016 and Q1 2017, with 2016 and 2017 GDP growth forecasts cut by the same amount.
The EC forecast is a bit more pessimistic; their call is for GDP growth to expand by just 2.1 percent in 2016 and 2017, following 2.3% estimated growth in 2015, a reduction of 0.3 percentage points and 0.1 percentage points, respectively, versus November’s forecast. They also lowered their 2016 inflation projection to 0.8 percent from 1.5 percent. The upshot? The prospects of a near-term increase in rates from the current 0.5 percent policy rate have diminished. Even the lone dissenter seeking a rate hike in prior meetings--Ian McCafferty—changed his view and voted to keep rates on hold. As it stands, the market doesn’t see a rate hike fully-priced in until 2018.
Tables from the Bank of England’s Inflation Report