1. Hello Guest Click here to check FX Binary Point Financial Directory

UK: Expectations moving too far? - ING

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

  1. FXStreet_Team

    FXStreet_Team Well-Known Member Trader

    Oct 7, 2015
    Likes Received:
    James Knightley, Senior Economist at ING, suggests that this “Super Thursday” raft of BoE information is likely to highlight the economic risks, but we doubt that the BoE will be keen to see market rate hike expectation being pushed much further back.

    Key Quotes

    “Today sees the Bank of England’s policy decision, the meeting minutes, the Inflation Report with new updated forecasts and the press conference hosted by BoE Governor, Mark Carney. The universal expectation is for stable policy with Ian McCafferty expected to be the sole dissenter who would like to see an immediate interest rate rise given the strength of the labour market.

    Financial markets though have pushed back their expectations for the first rate rise to 2018, which presumably reflects financial market uncertainty, external demand weakness and worries about the potential for Brexit (the UK voting to leave the EU later this year). However, we suspect that the Bank of England will not be particularly happy about this given that sterling has fallen markedly already (and will probably fall further ahead of the Brexit referendum) while interest rates have also dropped. This equates to a significant loosening of monetary conditions and so we could see their forecasts within the Inflation Report showing inflation projected to rise above 2% within the 2-year forecasting horizon.

    We are even more aggressive thinking that inflation could potentially reach 3% next year as sterling’s sharp fall pushes up import prices. We also doubt that the supermarket price war will exert the same deflationary effects as it did last year while commodity prices may gradually start to rise. Assuming that the UK votes to remain in the EU, we could also see the tight labour market finally result in a decent pick-up in wage growth.

    We are also upbeat on the growth story (again, assuming the UK votes to remain in the EU) so our view remains one whereby we believe that as the uncertainty lifts, the BoE will gradually start to tighten monetary policy from November 2016 onwards. Consequently, we suspect that Mark Carney will highlight the economic risks, but emphasise that the underlying fundamentals of the UK economy remain in decent shape. While unlikely to bring rate hike expectations forward in any significant way, it would at least prevent those expectations for rate hikes being pushed any further back into 2018.”
    For more information, read our latest forex news.

Share This Page