UK: Why MPC's hawkish tilt might not last? - HSBC

The UK MPC is sounding more hawkish and markets suggest the chances of a rate rise by year end are just over 50% but analysts at HSBC suggest that with weak wages, a slowing economy and Brexit risks looming, they still expect no rate rises this year or next. However, with unemployment falling and hawkish rhetoric from central bankers globally, August could be a close call, they further add.

Key Quotes

“Sterling rates are up and volatile as hawkish bias emerges

Implied sterling interest rates for end-2017 are almost 20bps higher than they were before the MPC's June meeting.  The path up has been volatile as different policymakers (or even the same policymaker) have sent different signals.  

For the hawks, further tightening in the labour market signals wage inflation ahead, even if there is no sign of it now.  Given that monetary policy works with long lags, for them it is appropriate to remove the 'emergency' post-referendum policy loosening.  Two members are already voting for hikes and the BoE's Chief Economist is thinking of joining them.  The Governor seems to see both sides and policymakers globally seem to be sounding a little more hawkish.  The market's reaction is understandable.” 

“The BoE's forecasts look optimistic to us 

Hang on though.  We've been here before in 2011 and 2014.  There are good reasons why a rate rise shouldn't be imminent. First, wage growth and domestically generated inflation remain weak. Second, there are signs the economy is slowing quite rapidly. Third, inflation is being driven by the fall in sterling, not domestic pressures that the MPC should seek to influence. Fourth, and perhaps most importantly, the BoE assumes a smooth and relatively painless Brexit. If the BoE included Brexit downsides as we see them, the case for immediate tightening could be smaller. Finally, an attempt to unwind post-EU referendum stimulus via a 'one and done' hike risks markets getting carried away and longer term rates could rise unduly.

To us, the recent comments from the Governor and Chief Economist do not imply they will definitely vote for a rate rise in August.  And in light of recent data we think the BoE will need to revise down its near-term growth forecast in August.  This is hardly a strong signal to increase policy rates for the first time since July 2007.  But with two new members (and therefore unknown quantities) joining the MPC, August could be a close-run decision.  By November, the economic headwinds may be blowing stronger.  We stick with our view of no rate rises this year or next.”