Protracted low prices and softer-than-estimated wage growth in the UK, combined with possible detrimental spillovers from emerging markets volatility, are expected to weigh down on sentiment at the January meeting of the BoE's MPC.
London - The Bank of England (BoE) is most likely to keep its policy stance unchanged at its January meeting. The rate will have remained at its record low of 0.5% for nearly seven years, and the volume of quantitative easing will stay at £375 billion.
Ian McCafferty is again expected to remain the only rate-setter voting for an immediate rate increase, just as he has been doing since August last year, although some analysts expect him to join the majority in the upcoming months if the price of oil continues to tumble, and exert significant downward pressure on domestic consumer price inflation.
Both the global and domestic financial and economic environments have skewed downward since the BoE's November Inflation Report, and the economic growth in the UK has slowed more than expected in the second half of 2015. The price of crude oil continue to hover near 12-year lows, and possible detrimental spillovers from emerging markets volatility pose a threat to financial stability and trade. The upcoming EU referendum in Britain, expected to take place as early as this coming summer, adds to this detrimental uncertainty and short-term risks.
The BoE policymakers partly reflected those events and developments at their December monetary policy meeting, when they revised down the outlook for short-term inflation, saying the annual rate of CPI was expected to remain below 1% until the second half of this year, longer than estimated back in November. The January meeting of the Monetary Policy Committee (MPC) is expected to remain in a similarly dovish mode.
The rate-setters are again expected to stress the protracted downward pressure on inflation from cheaper oil and soft wage growth. Weaker growth in the second half of 2015, and the latest business surveys pointing to only a timid rebound in the fourth quarter of last year, will also have had its say on the sentiment among the nine-strong rate-setting committee.
"We expect the soggier data to result in more dovish BoE minutes this week," research analysts at Bank of America (N:BAC) Merrill Lynch (BofA) wrote in their research paper published on January 12. BofA consequently pushed back expectation of the first increase in the BoE base rate from May to November this year. "The risks to that call are, in our view, still skewed to delay," BofA analysts added.
BofA economists also see Ian McCafferty, so far the lone wolf at the MPC calling for an immediate rate hike, dropping his vote in the next couple of meetings. This is despite the UK labor market tightening sharply, which is in McCafferty's view one the primary reasons for his most recent calls for a rate increase. "Further oil price falls provide, in our view, a good argument for stepping back from the rate hike argument for a while," BofA analysts suggested.
Softer data also led the IHS Global Insight's economists to push out back their expectations of the first interest rate hike from May to August. "We increasingly believe that the Bank of England is unlikely to raise interest rates from 0.50% to 0.75% before August. Furthermore, we increasingly suspect that interest rates will only rise once in 2016 and will end the year at 0.75%," IHS chief economist Howard Archer wrote in a note on Wednesday.
Similarly, economists at Rabobank wrote in their January BoE preview that they "have pushed back our call for the first BoE rate hike of the cycle from August to November 2016," on the back of the global volatility and weaker than estimated data coming out in the UK.
The US Federal Reserve ended its extraordinary monetary policy stance in December by increasing its base rate. Even though some commentators see this as a precursor to the BoE action, the policymakers in London expressed themselves clearly at the December meeting, when they said "there was no mechanical link between UK policy and those of other central banks, and the UK stance would be determined ultimately by the inflation outlook here."
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