BoE are expected to hold the base rate at 0.5%

With a 9% rise in house prices later this year and a 6% rise next year, the BoE should be worried about the over-heating housing market. This rise can be reduced if the BoE tightens monetary policy such as raising interest rates later this year. However, it is unlikely that the BoE will raise interest rates this year as CPI data y/y (Actual: 1.6%, Forecast: 1.8%, Previous: 1.9%, 19/08/2014) and average weekly earnings were disappointing (Actual: -0.2%, Forecast: -0.1%, Previous: 0.4%, 19/08/2014). This shows that there exists a divergence between inflation and wage growth, i.e. wage growth is below inflation. Hence, when wage growth increases in line with inflation then we are likely to see the BoE implement a rate hike. Speculation has increased that the rate hike may be implemented in Q1-2015 by 0.25% from 0.5% (effectively 0.75%). This will allow wages to catch up with inflation and unemployment to reduce further. Unemployment is at 6.4% and has significantly fallen this year, which shows promising signs about the current pace of the recovery. We expect the BoE to hold the base rate at 0.5% at this week’s rate setting meeting. In addition, the MPC statement may provide us with some insight on the timescale of an interest rate hike. 

The Fed on the other hand is not going to be achieving consumer expenditure led growth. This is due to recent data showing personal income (Actual: 0.2%, Forecast: 0.3%, Previous: 0.5%, 29/08/2014) and personal expenditure (Actual: -0.1%, Forecast: 0.2%, Previous: 0.4%, 29/08/2014) declining, whilst durable goods and non-durables goods have remained constant, price-wise (Core PCE price index m/m, Actual: 1.6%, Previous: 1.6%, 29/08/2014). This could hurt the recovery significantly. This is well below the 2% benchmark inflation rate set out by the Fed. Hence we will not be seeing a rate hike until mid-2015. If the Fed increases the interest rate any earlier then the US economy could face huge problems. This week will tell us if there still exists any slack in the labour market as ADP Non-Farm Employment Change (Forecast: 216K, Previous: 218K, 04/09/2014) and Non-Farm Employment Change (Forecast: 222K, Previous: 209K, 05/09/2014) data is to be released later this week.