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UK: Interest rates all set to rise in 2016 – HSBC

Discussion in 'Fundamental Analysis' started by FXStreet_Team, Dec 23, 2015.

  1. FXStreet_Team

    FXStreet_Team Well-Known Member Trader

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    FXStreet (Delhi) – Research Team at HSBC, push out their forecast for the first 25bp rate rise for UK from February to May 2016.

    Key Quotes

    A strong case for a policy tightening can be made: However, several of the arguments for tightening policy remain intact. This is why we move our call out by just three months. We still think rates will rise long before the market expects, as the market is not full pricing in a 25bp UK rate rise until January 2017.

    The pace of tightening will be slow, due to the low ‘natural’ interest rate: Following the first rate rise, we expect a very slow path up in policy rates. We forecast just one further 25bp rate rise in Q4 2016 and two 25bp increases in 2017. This slow pace of tightening reflects the fact that we think the natural interest rate is very low and likely to rise only slowly. Over the coming years, as these headwinds decline, the medium-term natural interest rate should rise back towards its long-term level. But the long-term natural real rate has been falling for the past 30 years due to demographic changes, slower productivity growth and reduced investment spending. Even if these factors were to reverse, the process would take decades.

    The EU referendum could affect the timing of rate rises: The main risk to our rate forecast is the EU referendum. We think September 2016 is the most likely month for the vote. That means the MPC has a window to start normalising policy before uncertainty surrounding the referendum intensifies. A September vote also means the MPC would know the result at its November meeting, meaning it could make a second rate rise if conditions were calm.

    However, if the UK and EU concluded negotiations in Q1 2016, there could still be time to hold a referendum in the early summer. With such a large event looming, a May rate rise might then be much less likely. It is also possible that negotiations are not concluded until late 2016, meaning the vote is pushed into 2017.”
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