BoE Governor Mark Carney reiterated his monetary policy view in September: "If the economy follows the path broadly consistent with this [August] forecast, then the decision [on rates], at least for me, will come into sharper relief around the turn of the year," Carney said.
In November, the governor turned more cautious again, saying: "The question in my mind is, when is the appropriate time for interest rates to increase in this economy, consistent with the strength of the domestic economy?"
The BoE meeting comes a week ahead of the very much awaited Fed decision on December 16. Central bank aficionados see the Fed meeting as the breaking point in US monetary policy, as Fed policymakers are expected to increase the base rate for the first time since 2006, and then remain slow and gradual in further tightening rounds.
Labour markets in both the US and UK have been tightening sharply in recent years. The jobless rate in the UK has been falling significantly, and hit 5.3% in September, close to the estimated long-run equilibrium unemployment rate, while GDP growth rates have been above the pre-crisis levels since early this year. But wage growth has remained too weak to help return inflation back to the 2% target in the medium term, according to a majority of rate-setters.
The UK financial system also seems stronger and more resilient compared to the post-crisis period. The BoE's Financial Policy Committee (FPC), the body responsible for stability, wrote in it statement last week that "financial conditions had shifted out of the post-crisis phase".
Regarding the inflation outlook, the BoE's latest quarterly forecast, released in November, stated that inflation was projected to start rising over the coming months, as the past declines in energy prices start to drop out of the annual CPI comparison at the beginning of next year.
However, policymakers warned in November that this pick-up in CPI may be lower over the first half of 2016 due to protracted low oil and other import prices. The latest data on oil prices show the crude benchmarks continued to slump due to the ongoing global supply glut, and following OPEC's failure to reach any production cut agreements last week.
An increasingly dovish outlook and the recent cautious comments by policymakers have led market participants to push their expectations for the first hike all the way to 2017. BoE Deputy Governor and rate-setting committee member Jon Cunliffe warned last week that such expectations were a bit premature.
Even though most rate-setters maintain a more or less dovish stance, the November MPC minutes revealed: "There continued to be a wide spread of views among members about the outlook for activity and inflation, and individual members placed differing weights on the risks from developments in emerging market and the potential influences on domestic demand growth."
Rabobank comments
Jane Foley, Rabobank senior FX strategist, said in a note this week that "the outlook for BoE interest rate policy is irreversibly tied to the performance of the exchange rate".
"A broadly weaker EUR would likely have corresponded with additional strength in sterling and implied another tightening in UK monetary conditions. That said, even though it may be inferred from this logic that a higher value in EUR/GBP may mean an earlier increase in BoE interest rates, we would argue that the factors that will drive the first hike in policy are yet to come into sharp focus," Foley offered.
BoE on sterling FX rates effects
The minutes from the BoE's Monetary Policy Committee (MPC) from November showed that the policymakers continued to express their concerns about the exchange rate and its impact on growth: "Subdued overseas demand and the rise in the sterling exchange rate since mid-2013 were likely to have weighed on growth in both the manufacturing and services sectors."
"In addition, although sterling had depreciated a little in recent months, the relatively high level of the exchange rate meant that lower import prices were still pulling down on CPI inflation. This effect was expected to diminish only gradually and was still likely to be affecting inflation in two years' time, although there remained considerable uncertainty about how much and how quickly moves in the exchange rate fed through to CPI inflation," the minutes read.
But the minority within the nine-strong rate-setting committee continued to argue that a robust labour market and slowly rising wages will sooner or later increase upward price pressures in the UK, and the inflation may very well overshoot the 2% target in the medium-term.
Berenberg comments
Berenberg bank UK chief economist Kallum Pickering argued in his one of his recent notes that "the Bank of England consistently underestimates the pace of the labor market recovery in their forecasts".
"Latest consumer credit data showing the fastest pace of growth in almost a decade. This adds to our concerns that the BoE is starting to fall behind the curve. This persistent lowballing on key domestic indicators could have implications for the inflation outlook - meaning that there is a risk that inflation may overshoot the 2% target in the medium-term. This would be undesirable as it may require the BoE to take a more aggressive path of rate hikes later on instead of starting a gradual process soon," Pickering said.
Predictions
Howard Archer of IHS Global Insight expects "the Bank of England is more likely than not to edge interest rates up from 0.50% to 0.75% sometime in the first half of 2016. We suspect that decent UK economic growth, stronger earnings growth and consumer price inflation gradually trending up will prompt the MPC to act around May".
The UK's National Institute of Economic and Social Research (NIESR) argues: "Rate of growth is consistent with the continued absorption of spare capacity in the UK economy and our own view that BoE is most likely to begin to increase rates in February 2016."
The British Chamber of Commerce (BCC) chief economist David Kern said in the latest outlook, "While we expect the first increase in UK interest rates in Q3 2016, we believe that rising international uncertainty provides strong arguments for the MPC to delay this."
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