Download Berenberg Macro Views Rate hike needed on strong growth: BoE

Berenberg Macro Views
Economics
Rate hike needed on strong growth: BoE preview
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There is no sign of growth slowing: In its last quarterly forecasts, in
February, the Bank of England (BoE) planned on keeping rates
unchanged until mid-2015 on the basis that growth would slow
through 2014. But there is no sign of that scenario playing out.
Policy meeting this month a non-event: The BoE is unlikely to
change policy at Thursday’s (8 May) meeting. The BoE will probably
raise its growth forecasts and bring forward its planned first interest
rate hike to Q1 2015 in the quarterly Inflation Report forecasts out on
14 May. That still puts the BoE behind the curve.
Booming UK: The composite PMI rose 1 point this month and
signals 5%+ GDP growth. The unemployment rate has fallen by 1ppt
in the past 12 months. GDP grew 0.8% qoq in Q1 despite flooding
hurting construction. House price inflation is in double digits. We
expect above-trend and above-consensus growth of 3.1% for 2014
and 3.3% for 2015. Record low interest rates are unnecessary.
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Below-target inflation is not a good reason to keep rates on hold:
Inflation is only 0.4ppt below target, which justifies looser than
neutral, but not record low, interest rates.
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Housing market is booming: Low interest rates have propelled
house price inflation up. Rapid price gains raise the chances of a
dangerous bubble, future debt growth, and could make a future
downturn more painful.
How low can it go?
British saving
1 November 2013
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Why not hike now? One reason would be if the BoE thought the
economy still had a lot of spare capacity. Weak wage growth could be
a sign of widespread underemployment that will keep inflation
subdued. But wage growth is not inexplicably weak given productivity
and unemployment, ie the underemployed do not seem to be putting
much downward pressure on wages. Firms report near record
recruitment difficulties now and pay growth is improving.
Guidance irrelevant
14 November 2013
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Guidance Mark II could be as short-lived as guidance Mark I: In
August last year the BoE introduced guidance Mark I. That
committed the BoE to not raise rates until unemployment fell to a 7%
threshold, which unemployment duly did within eight months.
Guidance Mark II was introduced in February to signal policymakers’
intention to not hike rates when unemployment fell below 7%.
Real chance of a hike this year: Given how vocal they have been
about keeping rates low, we expect the rate setters to try and hold off
until next year before hiking. We look for the first hike in Q1 2015.
But strong growth means we see a 35% chance of a Q4 2014 hike. If
the data remain as strong as now, that probability will rise.
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The BoE is getting behind the curve: As we argued in The great
tightening experiment (9 April 2013), the BoE will need to play catch-up
when it does start hiking. So we expect eight 25bp hikes by the end of
2016, leaving the BoE base rate at a still supportive 2.5%. We expect
the BoE to start selling its quantitative easing assets in early 2017.
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Policy should get interesting through the summer: We expect at
least one rate setter to break ranks and vote for a hike in September.
The Monetary Policy Committee members have changed substantially
over the past few months though, so the big uncertainty is whether a
majority of the nine members will support a rate hike before year-end.
1
US date with destiny
10 October 2013
Euro Plus Monitor 2013:
From pain to gain
3 December 2013
Global outlook 2014
13 December 2013
UK: Snowballing
recovery means earlier
rate hike
13 December 2013
Do the mistakes matter?
BoE Inflation Report
13 February 2014
The great tightening
experiment: BoE policy
2 May 2014
6 May 2014
Rob Wood
Chief UK Economist
+44 20 3207 7822
[email protected]
Berenberg Macro Views
Economics
Disclaimer
This document was compiled by the above mentioned authors of the economics department of Joh.
Berenberg, Gossler & Co. KG (hereinafter referred to as “the Bank”),. The Bank has made any effort to
carefully research and process all information. The information has been obtained from sources which we
believe to be reliable such as, for example, Thomson Reuters, Bloomberg and the relevant specialised press.
However, we do not assume liability for the correctness and completeness of all information given. The
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explicitly point to the stated date of preparation. The information given can become incorrect due to passage
of time and/or as a result of legal, political, economic or other changes. We do not assume responsibility to
indicate such changes and/or to publish an updated document. The forecasts contained in this document or
other statements on rates of return, capital gains or other accession are the personal opinion of the author
and we do not assume liability for the realisation of these.
This document is only for information purposes. It does not constitute a financial analysis within the meaning
of § 34b or § 31 Subs. 2 of the German Securities Trading Act (Wertpapierhandelsgesetz), no investment
advice or recommendation to buy financial instruments. It does not replace consulting regarding legal, tax or
financial matters.
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