11 Mar 2016
BoE: preview and identifying vulnerabilities - Rabobank
Analysts at Rabobank noted that the ECB this month further extended its monetary policy stimulus and explained that by contrast the Bank of England has maintained a steady hand since 2012.
Key Quotes:
"On first sight there would appear to be a huge gulf between the polices offered by the ECB and the BoE but several similarities can be drawn between the rhetoric offered by ECB President Draghi at the March 10 policy meeting and that of the BoE. Firstly both suggest that persistently low oil prices has fed the disinflationary pressures in the Eurozone and the UK. Although this has driven downward revisions to both the ECB’s and BoE’s inflation forecasts for this year, both central banks are optimistic that lower oil prices will support household incomes and positively impact growth potential. That said, both banks are wary about second round effects from low inflation and in the UK especially there are concerns about the impact on wage negotiations. On this basis we are mindful that many of the MPC members may be reluctant to hike interest rates until 2017. The sharp drop in sterling since the end of last year will offset some of the drag on inflation stemming from soft commodity prices and could hasten the recovery in the UK CPI inflation. This factor combined with the better tone of oil prices suggests that the resident hawks at the MPC could be indicating a preference for a rate hike in the second half of this year.
Even so, the combination of disappointing wage growth, weak gains in productivity in addition to political uncertainty suggests that the majority of the committee may favour a cautious approach to policy. Consequently we have delayed our forecast for the first hike in BoE rates from November 2016 to February 2017."
Key Quotes:
"On first sight there would appear to be a huge gulf between the polices offered by the ECB and the BoE but several similarities can be drawn between the rhetoric offered by ECB President Draghi at the March 10 policy meeting and that of the BoE. Firstly both suggest that persistently low oil prices has fed the disinflationary pressures in the Eurozone and the UK. Although this has driven downward revisions to both the ECB’s and BoE’s inflation forecasts for this year, both central banks are optimistic that lower oil prices will support household incomes and positively impact growth potential. That said, both banks are wary about second round effects from low inflation and in the UK especially there are concerns about the impact on wage negotiations. On this basis we are mindful that many of the MPC members may be reluctant to hike interest rates until 2017. The sharp drop in sterling since the end of last year will offset some of the drag on inflation stemming from soft commodity prices and could hasten the recovery in the UK CPI inflation. This factor combined with the better tone of oil prices suggests that the resident hawks at the MPC could be indicating a preference for a rate hike in the second half of this year.
Even so, the combination of disappointing wage growth, weak gains in productivity in addition to political uncertainty suggests that the majority of the committee may favour a cautious approach to policy. Consequently we have delayed our forecast for the first hike in BoE rates from November 2016 to February 2017."