Inflation WorriesThe consumer price index released on 15th December showed inflation stagnated month on month in November, though the year on year calculation showed a 0.1 per cent rise. Clothing prices weighed on inflation after they fell sharply between October and November. Chris Williamson, chief economist at data firm Markit warned that UK inflation â€œlooks set to remain weaker for longer than forecasters have recently been expectingâ€.
The BoE estimates the headline inflation to stay below 1 per cent in the first quarter of 2016. Domestic cost pressures will have to firm substantially to return inflation to 2% target in around 2 years. BoE Deputy Governor Cunliffe admitted disinflationary pressure lasted longer than was expected. Governor Carney noted price of oil has "fallen markedly again", which he believes has raised the risk of inflation staying subdued. However, oil alone cannot be blamed for dismal prices. The ONS has confirmed that impact of lower energy prices on inflation in November has been less compared to the previous months. Poor wage growth is also a significant factor keeping prices in check.
As the data shows, inflation figures remain much below the central bankâ€™s 2 per cent inflation target. Keeping the poor inflation in mind the BoE Governor Mark Carney said that the bank is committed to meeting the target and will not raise rates, if hiking rates is not the appropriate thing to do. The BoE, he noted aims at increasing the resilience of the banking system in the event of a downturn.
The BoE estimates UK economy is set to grow 2.7 per cent this year, down from a previous estimate of 2.8 per cent. It also slashed 2016 outlook to 2.5 per cent from 2.7 per cent. However, softer spending cuts announced by Chancellor George Osborne in November can be expected to give a boost to growth in 2016.
Consumer spending has been the main driver of growth this year. However, this too might no longer be effective in the face of low wage growth. Unemployment has held steady for some time now. The UK labor market data released on 16th December was a mixed bag. The unemployment rate however fell to 5.2 per cent in the three months to October, hitting a seven year low. However, wage growth fell, growing at its slowest in pace since early 2015 in the three months to October. Wage growth slowed to 2.4 per cent from 3 per cent recorded earlier. The latest wage data justifies the central bankâ€™s decision to not rush with rate hike decision. Governor Carney said he would wait for wage growth to rise above 3 per cent before raising interest rates. His sentiment was echoed by BoE Deputy Governor Minouche Shafik who reiterated that the rate cut would happen only when wages rise.
Wage growth remains a concern
Only higher wages can lift consumer spending and help to stabilize price. BoE Deputy Governor Minouche Shafik thus stressed on the need to raise wages. She said the rate cut would happen only when wages have risen significantly. Senior Economists at Lloyds Bank also feel rate hikes will happen only when wage growth is deemed satisfactory.
Economy marked by absence of balanced recoveryThe UKâ€™s deficit on trade in goods and services widened in October and came came in at Â£4.1 billion, up from the previous widening of Â£3.1 billion in September. Manufacturing output for October also fell. Manufacturing output fell 0.4 per cent month on month, lower than Septemberâ€™s 0.9 per cent increase. Manufacturers have been particularly hurt by low oil prices. Manufacturing output remains around 6.1 per cent below the level that it had reached when at peak. A survey published on 19th November showed British manufacturers expect their output will fall in the coming three months, the first such decline in three years. UKâ€™s economic growth this year has been so far driven primarily by domestically focused services, hampering the scope for a balanced recovery.
BoE ought to keep â€˜Brexitâ€™ considerations in mindBritain's planned referendum on its membership of the European Union is due. Economists hold there exists a lot of uncertainty over the vote's result. On the event of Brexit business sentiment in UK could be badly hurt and this will likely pose serious threat to Britain's economy in 2016. The central bank will thus have to keep the Brexit consideration in mind while deciding on monetary policy stance going forward.
When will the BoE raise rates?The BoE is in no rush to follow the U.S. Fed in raising rates. There is "no mechanical link" between the Bank's thinking and that of other central banks, the minutes of the December meeting highlighted. Cunliffe was unable - to put any timing on when the first upward move in rates was likely. All he could say was the BoEâ€™s next move would be dependent on economic data.
The BoEâ€™s earlier short-term inflation forecast prompted investors to push back their expectation of rate hike timing to late 2016/early 2017. BoE Governor Mark Carney had hinted earlier that decision on the probable time when BoE will raise rates will come into "sharper relief" around the turn of 2015. He however has now said that the central bank will move when the time is right. Economists polled by Reuters expect the BoE to begin raising rates in the second quarter of 2016.
Read also other related articles about what 2016 could bring for the markets:
EUR USD Forecast 2016
GBP USD Forecast 2016
USD JPY Forecast 2016
ECB Forecast 2016
RBA Forecast 2016
PBoC Forecast 2016
FED Forecast 2016
BoJ Forecast 2016
SNB Forecast 2016
Gold Forecast 2016
Information on these pages contains forward-looking statements that involve risks and uncertainties. Markets and instruments profiled on this page are for informational purposes only and should not in any way come across as a recommendation to buy or sell in these assets. You should do your own thorough research before making any investment decisions. FXStreet does not in any way guarantee that this information is free from mistakes, errors, or material misstatements. It also does not guarantee that this information is of a timely nature. Investing in Open Markets involves a great deal of risk, including the loss of all or a portion of your investment, as well as emotional distress. All risks, losses and costs associated with investing, including total loss of principal, are your responsibility. The views and opinions expressed in this article are those of the authors and do not necessarily reflect the official policy or position of FXStreet nor its advertisers. The author will not be held responsible for information that is found at the end of links posted on this page.
If not otherwise explicitly mentioned in the body of the article, at the time of writing, the author has no position in any stock mentioned in this article and no business relationship with any company mentioned. The author has not received compensation for writing this article, other than from FXStreet.
FXStreet and the author do not provide personalized recommendations. The author makes no representations as to the accuracy, completeness, or suitability of this information. FXStreet and the author will not be liable for any errors, omissions or any losses, injuries or damages arising from this information and its display or use. Errors and omissions excepted.
The author and FXStreet are not registered investment advisors and nothing in this article is intended to be investment advice.