Mattias Bruér (pictured), Economist at SEB, the leading Nordic corporate bank, comments on the Bank of England’s decision not to increase interest rates…
With inflation being the main obstacle against rate hikes, today’s announcement does not change our view that the Bank of England (BoE) will leave rates unchanged this year and we look for the first rate hike in February 2016. The monetary policy normalisation will likely be very gradual, which also is what markets are expecting.
While the UK economy has momentum there is no CPI inflation at all which is an argument against rate hikes. While the near-term inflation outlook is muted some members still saw upside risks to the inflation forecast. From a labor market perspective longer-term inflation risks are skewed to the upside, but oil prices have declined and the pound appreciated since the economic update in May. Indeed the strong pound is a factor that could delay hikes; according to the minutes there is a risk that its appreciation could depress inflation for a ‘persistent period’”.
With respect to annual inflation averages, the BoE forecast that inflation will only average 0.3 per cent in 2015 compared to 0.6 per cent in May and increasing to 1.5 per cent in 2016. As such, the outlook for inflation is not suggesting that rate hikes are imminent and does not change our view of a February 2016 lift-off.
