UK Interest Rates
Fundamentals Update as at 19 November 2013 by Lorenzo Beriozza
The Bank of England (BoE) voted unanimously (9-0) to leave interest rates and QE on hold at 0.5% and £375 billion respectively at their November meeting, in line with market expectations. The broader tone of the debate was also quite balanced, consistent with the view that the BoE are currently some distance away from either tightening or loosening monetary policy at present.
Regarding the growth outlook, the BoE noted risks in both directions. On the upside, the growing confidence in the recovery combined with easing credit conditions might prompt corporate spending – which has remained muted thus far – to add further impetus to the more consumer-led growth of recent quarters. But on the downside, further rebalancing/deleveraging in both the UK and Euro area, and weak real income in the UK household sector, could put a brake on the above-trend pace of GDP growth since the Spring. Overall, the BoE’s November Inflation Report forecasts envisaged GDP growth continuing at a circa 2.5- 3.0% annual pace through 2014-2016.
On the inflation front, the BoE welcomed the sizeable fall in CPI inflation from 2.7% to a close-to-target 2.2% in October. Taken alongside the appreciation in sterling in recent months, they judged that the probability of CPI inflation being above 2.5% in 18-24m time (one of their forward guidance knockout clauses) had correspondingly fallen to around 33%, compared with around 40% in their August projections.
The BoE again noted that they could ultimately lower their 7% unemployment rate threshold for forward guidance in due course. However, that decision will be determined by the conditions prevailing at around that time.
The BoE’s own November Inflation Report forecasts gave a circa 40% chance of the unemployment rate reaching 7% by the end of 2014 (with unemployment data since then lower than expected) and a circa 40% chance of CPI inflation being above 2.5% at that time. Such uncertainties around the outlook impair the extent to which the BoE can credibly comment on the prospects for forward guidance changing that far in the future, in our view.
Overall, while the BoE may ultimately raise rates before the mid-2015 time suggested by the November Inflation Report projections, there was little new in these minutes to sway views in either direction.
Source: BOFA
