UK: MPC comments on the GBP on the hawkish side

Today the Bank of England (BoE) released the minutes from its April meeting. The Monetary Policy Committee (MPC) voted unanimously in favour of keeping the Bank Rate and the stock of purchased assets unchanged at 0.50% and GBP375bn, respectively. Two members, probably the two hawks Ian McCafferty and Martin Weale, regarded the decision as finely balanced. All members agreed that the next rate move is likely to be an increase. This was as expected.

The minutes state that the Bank staff has made a small downward revision to the short-term inflation forecast, among other things, due to the decline in EUR/GBP, which weighs on inflation through lower import prices. According to the Bank staff, it is still possible that inflation will drop below 0% in the coming months (we do not expect this to be the case). As the MPC recognises that monetary policy works with a lag, this small revision should not affect the MPC’s timing of the first hike as inflation is still expected to pick up at the end of the year when the effect from the falls in energy and food prices starts to fade.

The comments on the GBP were a bit on the hawkish side, as the minutes from the April meeting say that there is ‘some evidence’ that the appreciation of the GBP has passed through to goods prices more rapidly than anticipated, implying that ‘there might be less downward pressure to come from this source in future’. If so, this could lead to ‘a faster pickup in inflation’ when the drop in energy and food prices starts to fade and would support our case for a rate hike later this year.

The MPC thinks that increasing growth in Europe is very beneficial for the UK economy, as growth in the UK’s biggest export market is much more important for UK exports than the decline in EUR/GBP due to the ECB’s asset purchase programme.

Comments on wage growth were as expected. Wage growth remains subdued and needs to pick up further in order for the MPC to reach the 2% inflation target. Future wage growth is still a key determinant for the timing of the first hike.

Last week we postponed our expectations for the first Bank Rate hike three months from August 2015 to November 2015, see also Research UK: We have moved the firstBoE hike to November 2015, 15 April. The main reasons behind our new call are that we have pushed our call for the first Fed hike to September, the appreciation of the GBP in recent months and hard data in Q1 disappointing so far. We still believe that BoE will hike this year despite low inflation, as inflation is expected to pick up when the effect of the drop in food and energy prices starts to fade. Another reason is that we expect wage growth to pick up further this year in step with the decline in labour market slack, however wage growth remains a downside risk to our call.