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Berenberg Macro Views Economics Rate hike needed on strong growth: BoE preview • • • 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. Key Macro Views reports Understanding Germany – a last golden decade ahead 13 October 2010 Tough love: the true nature of the euro crisis 20 August 2012 Long and winding road: UK unemployment 4 September 2013 Home truths: UK housing 18 September 2013 • 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. • 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 • 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 • • 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. • 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. • 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 provided information has not been checked by a third party, especially an independent auditing firm. We 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. Remarks regarding foreign investors The preparation of this document is subject to regulation by German law. The distribution of this document in other jurisdictions may be restricted by law, and persons, into whose possession this document comes, should inform themselves about, and observe, any such restrictions. United Kingdom This document is meant exclusively for institutional investors and market professionals, but not for private customers. It is not for distribution to or the use of private investors or private customers. United States of America This document has been prepared exclusively by Joh. Berenberg, Gossler & Co. KG. Although Berenberg Capital Markets LLC, an affiliate of the Bank and registered US broker-dealer, distributes this document to certain customers, Berenberg Capital Markets LLC does not provide input into its contents, nor does this document constitute research of Berenberg Capital Markets LLC. In addition, this document is meant exclusively for institutional investors and market professionals, but not for private customers. It is not for distribution to or the use of private investors or private customers. This document is classified as objective for the purposes of FINRA rules. Please contact Berenberg Capital Markets LLC (+1 617.292.8200), if you require additional information. Copyright The Bank reserves all the rights in this document. No part of the document or its content may be rewritten, copied, photocopied or duplicated in any form by any means or redistributed without the Bank’s prior written consent. © May 2013 Joh. Berenberg, Gossler & Co. 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