Rate hike still unlikely until next year as inflation falls to 1.6%

Good morning,

• MPC votes 7-2 against a rise in interest rates;

• Rate hike still unlikely until next year as inflation falls to 1.6%;

• Two FOMC members may vote in favour of hike.

US futures are edging lower ahead of the release of the Fed minutes, which comes later on in the session. Ahead of the open, the S&P is seen 2 points lower, the Dow 19 points lower and the Nasdaq 4 points lower.

I imagine there’ll be a little more caution as we approach the release given the slightly surprising Bank of England vote on interest rates at the previous meeting. The minutes of that meeting was released this morning and showed two policy makers, Martin Weale and Ian McCafferty, voted in favour of a 25 basis point hike, taking the rate to 0.75%.

I say it was a surprise but both of these policy makers had become notably more hawkish in the last couple of months, making a vote on the hike more likely. I think many expected some dissenting voices at the meeting but not necessarily votes this early on. The response in the market would suggest that this doesn’t change much. Of the remaining members, one or two may be tempted to vote in favour this year based on recent comments but not enough to form a majority. Especially not following yesterday’s CPI number which showed inflation falling to 1.6% in July, which should be enough to convince most policy makers that a hike is not warranted at this time.

With members of the MPC now favouring a rate hike, it will be interesting to see if their US counterparts at the Federal Reserve do the same. We’ve already seen Charles plosser vote against keeping rates the same and he may soon be joined by other hawkish members, with Richard Fisher appearing the most likely to join him, based on recent comments.

While I don’t think that we’ll see a rate hike until the end of the first quarter of next year, at the earliest, given Chairwoman Janet Yellen’s very dovish stance, and the similar stance of most of the committee, two or three votes in favour of raising rates could cause quite a stir in the markets.