FXStreet (Barcelona) – James Knightley, Senior Economist at ING, notes that the UK economy is in decent shape, but low inflation, sterling strength, falling commodity prices and uncertainty relating to Greece and China mean that a unanimous 9-0 vote in favour of steady policy looks probable, and further forecasts February 2016 to be the likely timing for a rate hike.
Key Quotes
“The hawks on the Bank of England’s Monetary Policy Committee are becoming more vocal. With 2014 GDP having been revised up to 3% and 2015 growth likely to come in not far below that, the amount of spare capacity in the UK economy is shrinking. This is most evident in the labour market with rapid job creation finally resulting in rising wage growth. Given that the service sector dominates the UK economy and wages are the main cost to service sector businesses, there is the concern that inflation pressures are starting to build, albeit from a low base.”
“However, commodity prices have turned lower in response to uncertainty relating to Greece’s future in the Eurozone and the precarious position of the Chinese equity market. These factors also run the risk of general economic contagion and are being closely followed by the central bank. We have also seen sterling continue to push higher, which is hurting the manufacturing sector’s competitiveness along with depressing import price inflation. This implies that inflation is unlikely to pick up markedly in the near-term, and points to a unanimous 9-0 vote in favour of steady policy today.”
“The key to determining the path of monetary policy remains wages. With employment, vacancy and labour market turnover statistics suggesting the amount of slack in the labour market is shrinking, we suspect wages will continue to rise. Given the lags involved in monetary policy we continue to favour February as the start of the tightening cycle.”
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