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9 Apr 2015
Low inflation won’t deter BoE from hiking rates – Danske
FXStreet (Barcelona) - Mikael Olai Milhøj, Analyst at Danske Bank, expects the BoE MPC to hike rates even if inflation rate remains low if the medium-term inflation outlook calls for stricter measures.
Key Quotes
“The minutes from the March meeting suggested that the MPC has become more concerned about the appreciation of sterling. Stronger sterling puts downward pressure on inflation through lower import prices. Although the effective exchange rate has depreciated slightly since the March meeting, it is still stronger than it was at the end of 2014.”
“This is mainly due to divergent monetary policies, as the ECB has just launched its QE programme while the first rate hike in the UK is approaching.”
“We expect the MPC to hike rates despite the low inflation rate if the medium-term inflation outlook calls for tighter monetary policy. The low inflation is mainly due to the falls in energy and food prices which should begin to drop out at the end of this year.”
“As the MPC recognises that monetary policy works with a lag, the falls in energy and food prices alone cannot justify holding off from hiking, in our view.”
“However, other factors may cause the bank to wait. Firstly, as explained previously, the appreciation of sterling puts downward pressure on inflation through lower import prices.”
“Secondly, the current very low inflation rate may lead to second-round effects so that wage growth – against expectations – does not pick up further.”
“Thirdly, the timing of the first Fed hike will also be important as we view the MPC as a ‘light’ version of the FOMC.”
Key Quotes
“The minutes from the March meeting suggested that the MPC has become more concerned about the appreciation of sterling. Stronger sterling puts downward pressure on inflation through lower import prices. Although the effective exchange rate has depreciated slightly since the March meeting, it is still stronger than it was at the end of 2014.”
“This is mainly due to divergent monetary policies, as the ECB has just launched its QE programme while the first rate hike in the UK is approaching.”
“We expect the MPC to hike rates despite the low inflation rate if the medium-term inflation outlook calls for tighter monetary policy. The low inflation is mainly due to the falls in energy and food prices which should begin to drop out at the end of this year.”
“As the MPC recognises that monetary policy works with a lag, the falls in energy and food prices alone cannot justify holding off from hiking, in our view.”
“However, other factors may cause the bank to wait. Firstly, as explained previously, the appreciation of sterling puts downward pressure on inflation through lower import prices.”
“Secondly, the current very low inflation rate may lead to second-round effects so that wage growth – against expectations – does not pick up further.”
“Thirdly, the timing of the first Fed hike will also be important as we view the MPC as a ‘light’ version of the FOMC.”