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BoE: Rate hike coming in May 2016 – Deutsche Bank

Discussion in 'Fundamental Analysis' started by FXStreet_Team, Jan 4, 2016.

  1. FXStreet_Team

    FXStreet_Team Well-Known Member Trader

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    FXStreet (Delhi) – Research Team at Deutsche Bank, suggests that after the Fed raised rates in December, their call for the first BoE move in May looks reasonable based on past experience.

    Key Quotes

    “The Bank is not governed by US policy — but there are numerous reasons we think the MPC will follow suit with a lag: i) globalisation has meant increased synchronisation, with both the BoE and Fed facing the same external conditions, ii) the UK is sandwiched between the tightening Fed and loosening ECB, iii) given the potential risks from a Fed move (particularly to EM), it seems reasonable for the BoE to wait given the UK's external sensitivity, and iv) in signaling the start of a hiking cycle a Fed tightening could push the dollar higher leaving the pound weaker (note our bearish sterling forecasts) — giving the BoE more room to cut.”

    “The timing of UK rate rises could be impacted by the EU referendum. The Conservative Party's manifesto pledged a referendum before end 2017. A delay raises the risk that inward investment is not merely deferred but diverted to other countries. This could be particularly disruptive to growth given that the UK has the largest stock of inward investment globally outside of the US. The government needs to balance the competing objectives of a swift enough vote to retain investment, but allowing sufficient time for negotiations with Brussels.”

    “We expect CPI to average 1.1% in 2016 but it will probably still be shy of 1% at the time of the May inflation report. Evidence of rising inflation will be important to the BoE when it comes to deciding to tighten policy, as will improved prospects for wages and economic growth generally. Some on the Monetary Policy Committee would no doubt feel uncomfortable raising rates at the same time as having to explain the downside miss to its inflation target, but we do not expect this to stop the Bank from hiking.”
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