Bank of England maintains Bank Rate at 0.50% - we still look for the first hike in Q3 15

As expected, the Monetary Policy Committee (MPC) just announced that it voted to maintain the Bank Rate and the stock of asset purchases at 0.50% and GBP375bn, respectively.

There was no statement in connection with the announcement. We will get more insight into the view of the MPC when the minutes from the meeting are published on 18 March. We expect that the MPC voted unanimously (9-0) in favour of maintaining the Bank Rate and the stock of asset purchases. However, note that the MPC, according to the minutes from the February meeting, has become more divided, as two members think ‘there could well be a case for an increase in the Bank Rate later in the year’, while one member judges that ‘the next change in the stance of monetary policy is roughly as likely to be a loosening as a tightening’, most likely due to the fact that inflation is much below the 2%-target. See also Continued improvement in the labour market paves the way for a rate hike later this year, 18 February.

We still expect the first hike to arrive in August but stress that risks are tilted towards a hike later in Q3 or possibly in Q4. There are several reasons for our somewhat dovish view. Firstly, the UK recovery remains on track and we expect solid growth both this year and next, supported by the low commodity prices, positive real wage growth and increasing growth in Europe. Secondly, the unemployment rate is currently at 5.7% and is approaching the Bank of England’s estimated medium-term equilibrium unemployment rate at 5.5%, implying that the slack in the labour market is diminishing. In the Inflation Report from February, the Bank of England estimated that slack is around 0.5% of GDP. Thirdly, both wage growth and core inflation are increasing, implying no deflationary tendencies. Fourthly, the MPC recognises that the very low inflation is due to temporary factors that should drop out at the end of this year, implying that inflation could increase sharply. As the MPC recognises that monetary policy works with a lag, we expect it to hike despite low inflation if the medium-term outlook calls for a tighter monetary policy.

See next page for illustrative charts.