Market participants will be focusing on the BoE rate and QE announcement on Thursday. It is very likely the central bank will leave its monetary policy stance unchanged in July – the base rate will stay at the record low of 0.5% and the QE volume at £375 billion. More details will be revealed in the MPC minutes due on July 22.
Based on the most recent speeches and interviews by BoE rate-setters, we can expect a rift between doves and hawks as early as the summer's end.
BoE policymaker Martin Weale told the Financial Times on June 23 that the Bank of England should be ready to start raising the base interest rate as early as in August this year as the labor market continues to tighten markedly.
Weale is viewed as one of the most hawkish members of the BoE's nine-strong Monetary Policy Committee (MPC). Weale, together with policymaker Ian McCafferty, had voted for an interest rate hike between August and December last year, before the pair dropped their vote when inflation was falling sharply down below the 2% target.
Weale's colleague at the MPC, Andrew Haldane, is much less enthusiastic about tightening the policy earlier than necessary. Haldane, who is the BoE chief economist and is considered a dove among BoE rate-setters, rejected calls for an earlier rate hike in the most recent speech he gave at the Open University on June 30.
Haldane argued that the recent pick-up in wage growth is weak proof that domestically-driven consumer price pressures are strong enough to push inflation up toward the 2% target in a two-year time period. "April's wage data was news, encouraging news … But one swallow does not a summer make ... Wage growth is causing some fluttering, but not in this dovecote," he said.
The general consensus among economists is that the BoE could start normalizing policy with a 25 basis points rate increase sometime in the first quarter of 2016, if inflation picks up as expected and the macro data do not disappoint notably.
According to the latest estimate by the National Institute of Economic and Social Research (NIESR), economic performance in Britain improved and spare capacity continued to be absorbed in the second quarter, with the quarterly rate of GDP estimated to have accelerated to 0.7%, up from 0.4% in the first three months of this year.
NIESR therefore expects the Bank of England "to begin increasing Bank Rate in early 2016, most likely coinciding with the February Inflation Report." Also, a slower pace of fiscal adjustment, announced by Chancellor George Osborne on Wednesday, should allow the Bank of England to tighten policy more briskly.
UK prepared for Greek drama
The BoE said last week the risks to financial stability from the ongoing crisis in Greece and the euro zone had intensified since early this year, although the direct exposure of UK banks to Greece are very small.
BoE Governor Mark Carney said he had been in constant touch with his euro zone colleagues over the last two weeks and added that the Financial Policy committee (FPC) and the whole financial system based in the UK is well prepared for the worst when it comes to the Greek crisis.
"The United Kingdom is relatively well insulated from the direct consequences of events in Greece. UK banks’ exposures to Greece are very small relative to their capital bases. The footprint of Greek banks in the UK is tiny compared to the size of our economy," Carney said during last week's FPC statement press briefing.
Carney also said "the risks associated with low inflation and high indebtedness in the euro area have reduced" while "the burden of household debt in Britain has continued to fall modestly, and its distribution has improved."
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