U.K. markets had been distinctly jittery ahead of the Bank of England’s (BOE) “Super Thursday” on 5 November. After a strong manufacturing Purchasing Managers’ Index, and U.S. Federal Reserve Chair Janet Yellen stating that the December meeting of the Federal Market Open Committee remained “live” to a U.S. rate hike, would the BOE strike a more hawkish tone? Judging by today’s BOE Inflation Report and associated press conference, they have not. It remains the case that any action from the BOE will be a good six months from now.
The challenge for the BOE’s Monetary Policy Committee (MPC) is still understanding how the opposing forces of domestically generated strength and imported weakness will influence U.K. economic growth and inflation, at a time when U.K. headline inflation is just -0.1%. Indeed, the headline inflation rate is at a level necessitating a quarterly open letter from the BOE governor to the Chancellor of the Exchequer explaining why inflation is so low. And based on the BOE’s latest inflation projections, these letters will continue to flow for the next 12 months.
So what is the message we should take away from “Super Thursday?” The first point to note is that one aim of Thursday’s BOE releases is to reinforce the message that U.K. monetary policy need not be perfectly correlated to the U.S. If indeed the Fed does tighten policy in the months ahead, there is no automatic read through to the U.K. Recall the MPC has a solitary target of inflation at 2% over the medium term; so by forecasting a very low inflation rate for much of 2016, the MPC appears to be distancing itself from Fed policy.
The second point is that it still seems likely that the U.K. will see an interest rate hike in 2016. On some measures, the U.K. is closer to full capacity than the U.S. economy, and assuming growth continues in line with PIMCO’s 2.5% cyclical forecast, the U.K. will see higher wages and rising domestically generated inflation, a point I discussed in my October 2015 U.K. Perspectives, “A Very British Recovery.”
That still means that a U.K. rate hike around the middle of 2016 is perfectly plausible, but it does not look like it is coming earlier than that.