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19 Dec 2013
Flash: BoE to hike rates in August 2014 - Nomura
FXstreet.com (Bali) - According to Philip Rush, Economist at Nomura, on the back of rosier economic conditions, the BoE will be forced to increase interest rates in August 2014.
Key Quotes
"Spare capacity's demise demands a rate rise Surging job creation is lowering unemployment without a commensurate supply-side improvement, so spare capacity is being rapidly used up. This is what matters to the BoE. We now expect its 7.0% unemployment threshold to be reached in Q1 and firmly breached in Q2, forcing a rate hiking cycle to start in August 2014 (formerly February 2015)."
"So we believe that unemployment is a good measure of spare capacity and it will stretch credibility to argue otherwise once it falls below 7%, assuming the decline is driven by ongoing employment growth. By the time of the August MPC decision and accompanying forecast round for the Inflation Report, we expect it will be looking at a 6.8% unemployment rate corresponding to May 2014 (released on 16 July)."
"The steep ongoing pace of decline and absence of supply-side improvement at that stage would be sufficiently concerning for the inflation outlook to demand a gradual pace of rate hikes. As such, we are pulling forward our call for the first BoE rate hike from February 2015 to August 2014. That takes us even further ahead of the market and consensus of economists but we simply do not believe the MPC can ignore the data and delay."
"With an even earlier start to the hiking cycle, there would be time to take policy back closer toward neutral, allowing it more flexibility to respond to any future downturn. We continue to expect that downturn to come in 2016 when the help-to-buy scheme ends, households‟ expectations of ever higher house prices get invalidated, debt concerns return and with them deleveraging. In short, the current virtuously reinforcing confidence cycle could turn into a negatively reinforcing one. Without much fiscal room to respond, the pressure would be on the BoE so we still expect it to terminate its hiking cycle by the end of 2015, albeit at a higher rate than before."
Key Quotes
"Spare capacity's demise demands a rate rise Surging job creation is lowering unemployment without a commensurate supply-side improvement, so spare capacity is being rapidly used up. This is what matters to the BoE. We now expect its 7.0% unemployment threshold to be reached in Q1 and firmly breached in Q2, forcing a rate hiking cycle to start in August 2014 (formerly February 2015)."
"So we believe that unemployment is a good measure of spare capacity and it will stretch credibility to argue otherwise once it falls below 7%, assuming the decline is driven by ongoing employment growth. By the time of the August MPC decision and accompanying forecast round for the Inflation Report, we expect it will be looking at a 6.8% unemployment rate corresponding to May 2014 (released on 16 July)."
"The steep ongoing pace of decline and absence of supply-side improvement at that stage would be sufficiently concerning for the inflation outlook to demand a gradual pace of rate hikes. As such, we are pulling forward our call for the first BoE rate hike from February 2015 to August 2014. That takes us even further ahead of the market and consensus of economists but we simply do not believe the MPC can ignore the data and delay."
"With an even earlier start to the hiking cycle, there would be time to take policy back closer toward neutral, allowing it more flexibility to respond to any future downturn. We continue to expect that downturn to come in 2016 when the help-to-buy scheme ends, households‟ expectations of ever higher house prices get invalidated, debt concerns return and with them deleveraging. In short, the current virtuously reinforcing confidence cycle could turn into a negatively reinforcing one. Without much fiscal room to respond, the pressure would be on the BoE so we still expect it to terminate its hiking cycle by the end of 2015, albeit at a higher rate than before."