The Bank of England has not changed interest rates since March 5, 2009, but they are now planning for a rate increase within the next 12 months.
The April MPC Meeting Minutes caused sustained strength in the pound as it showed that two members – presumably Ian McCafferty and Martin Weale who both voted for a rate rise last year – saw the decision to keep rates on hold as finely balanced. The MPC saw low inflation as a largely temporary phenomenon caused by the significant drop in oil prices. All nine members agreed it was probable that rates would rise over the next three years. The minutes were taken as modestly hawkish. The May minutes showed nothing material had changed regarding these views. The next minutes will be released on June 17 and should be dissected carefully for any changes in outlooks.
In the most recent Quarterly Inflation Report, released May 13, the BOE cut its forecasts for economic growth over the next three years and confirmed that it would likely start to raise interest rates in around a year’s time. GDP projections for 2015 were reduced from the February estimate of 2.9% to 2.5%. The Bank also cut forecasts for exports, business investment and household spending. During the accompanying press conference, Governor of the BOE Mark Carney added that growth prospects could weaken further if the Greek debt crisis worsens. Collectively the inflation report and press conference prompted selling in sterling.
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CPI readings for the annual period ending April 30 showed the UK in deflation for the first time in 55 years. The year-on-year change in consumer prices was a decrease of 0.10%. However, the change for the month of April was an increase of 0.20%, but this was below economists’ estimate of 0.40%. As the Bank had already noted the distinct possibility of negative inflation, due largely to low oil prices, this negative number was not a huge shock to the market. The next CPI release is due Tuesday, June 16 and is expected to show a rise in prices of 0.20% for the month of May and 0.10% for the annual period ending May 31. A matching or beat of this y/y estimate will show the UK is out of deflation.
Recent jobs figures, released on May 13, showed a solid increase in wage inflation, with Average Weekly Earnings – expressed as a 3-month average compared to the same period a year prior – ticking up to 1.9% up from 1.7% a month earlier. Despite the headline Claimant Count missing estimates, the report was positive for the pound as the BOE are interested in seeing an increase in wages to inform their rate hike decision. Of note is the strong upward trend in wages, with Average Weekly Earnings rising consistently from -0.1% in June 2014 to 2.1% in December, then tracking relatively sideways to the current 1.9% level. The next reading, due June 17, is expected at 2.1%; if this figure beats estimates again it will be the highest level of wage growth since June 2013.
The last few weeks of UK data has generally been weak. Second Estimate GDP was released on May 28 and missed expectations of 0.4%, coming in at 0.3%, down from 0.5% in the prior quarter. In addition, Manufacturing Production, Services PMI, Manufacturing PMI and Producer Price Index have all missed estimates.
This coming week, starting Monday, June 15, is a huge week of data for the pound and we expect to see volatility. Technically, the currency is at multi-year highs against Asia-Pacific currencies (AUD, NZD, JPY) and close to that level against other counterparts. The pound remains a fundamentally bullish currency with the bias being to the upside heading into this week’s data.