A interesting article in FT Advisor recently discussed one of the hot topics in the currency markets at present: - When will the BoE raise interest rates? A BNP Paribas economist is betting on a May rise, stating that “if they don’t act in May then I don’t think they will be able to raise it later in the year.”
We set out Caxton FX’s view last week and we are sticking to it, steadfast and defiant; the BoE will raise rates in June.
Discussions about a UK rate rise in April were dashed this month by an unchanged March voting pattern within the MPC and a distinct shortage of hawkish rhetoric. An April rise was made yet more unlikely following the events in Japan and the UK growth downgrade in the government’s annual Budget. So what about May? A May rate rise is by no means beyond the realms of possibility. This month’s MPC minutes did express a concern that inflation could exceed 5% in the near term, suggesting this could be a benchmark past which the BoE will be reluctant to tolerate further escalation.
Inflation currently sits at 4.4%, the next UK inflation updates comes on 12th April, which will be the inflation figure on which the May 5th BoE interest rate decision will be largely based. Therefore (stay with me), the inflation figure for April would have to increase by 0.6% for the MPC to finally be forced into biting the bullet on a rate hike. A month-on-month inflation increase of 0.6% has not been seen in over a year; it’s not unheard-of but the odds are that it won’t. This is all a bit statistical but it does suggest a May rate rise would be a surprise.
Perhaps more convincing is the argument that the MPC will remain in wait-and-see mode. The majority of policymakers want evidence of a stronger economic recovery. Indeed, we have seen sterling suffer in the past fortnight as sentiment towards the British economy has soured. The present outlook for UK GDP is weak and recent retail sales figures and consumer confidence data set alarm bells ringing. For a May rate rise, we imagine that a clean sweep of positive UK manufacturing, services and construction data would be required, in combination with an encouraging first quarter UK GDP announcement on April 27th. Whilst we do see negative perceptions of the UK economy as somewhat overdone, we are unconvinced the MPC will get the economic indications they are stubbornly waiting for.
In addition, we do not expect a further change in the voting pattern at the MPC’s April meeting – who are the fourth and fifth voters going to be I ask...? Two more MPC policymakers would have to be recruited to Andrew Sentance’s hawkish camp in the space of one month. Again this seems improbable; there have certainly been no indications of any further MPC hawks emerging in recent policymaker speeches.
There is also a political reason for delaying the rate rise. UK local elections are being held on 5th May and it seems unlikely that the MPC will announce a rate rise that would affect the political process, particularly as it would be detrimental to the incumbent Conservative government with whom the BoE work so closely.
As for the “May or not at all” comment, which the FT referred to... this really makes little sense, there will of course be a rate rise this year, there is nothing about the month of May that constitutes a deadline.
Richard Driver
Analyst – Caxton FX
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