A third hawk among the BoE’s MPC members did not appear in September, in line with our expectation. As in August, Weale and McCafferty voted for a 25bp rate hike at the September MPC meeting, but the majority of MPC members is still firm (7-2) for unchanged rates. We continue to look for the first rate hike in Q2 2015.
The two hawks Weale and McCafferty continued to stress that it is desirable to raise rates before wage pressure show, and after a rate hike policy will remain extremely supportive.
But the majority still see insufficient evidence of inflationary pressures to justify an immediate increase in Bank Rate. The majority highlighted that evidence of deterioration in the Euro area was the most significant development since the meeting in July.
“A premature tightening in monetary policy might leave the economy vulnerable to shocks, with the scope for any stimulus that subsequently became necessary being limited,” the minutes said. A rate increase “well ahead of any prospective pickup in wage and income growth risked increasing the vulnerability of highly indebted households.”
The majority view that wages remain muted was supported by today’s employment report, showing that wages ex bonuses rose an annual 0.7% in the three months to July, matching a record low. Still, the unemployment rate dropped more than forecast, to 6.2% in the three months to July, a six-year low, down from 6.4%.
A rate hike from the BoE is getting closer given the strength of the economic recovery, but because of the lack of inflationary pressures we continue to look for the first rate hike in Q2 2015. Ahead of today’s MPC minutes, market pricing was for a likely 25bp rate rise in February 2015.
The decision to keep the Asset Purchase Facility unchanged remained unanimous in September.
Nordea