Bank of America Push Back Internal Forecasts for BoE Rate Hike Regime
Above: Analysts at one of the world's largest investment bank have announced they have shifted their forecast for the Bank of England's interest rate raising profile. Pic (C) Pound Sterling Live 2015.
“Beyond delaying the first hike, we also take down the pace of normalization into 2016, finishing the year at 1.25% (slightly below the analysts’ consensus) against 1.75% so far.” - Gilles Moec at Bank of America Merrill Lynch Global Research.
Bank of America Merrill Lynch have revisited their monetary policy call for the UK and in doing so push back their expectations for the first interest rate hike in years.
With central bank policy being absolutely central to currency movements this news will be seen as a negative to the British pound’s outlook.
The move by BofA is taken following the most recent Bank of England (BoE) Quarterly Inflation Report that sounded a positive tone concerning the UK’s economic outlook.
The pound sterling moved higher in the wake of the report.
Bank of America: More Dovish then Consensus
BofA push their call for the first BoE rate hike to November 2015 – from August.
That now puts the investment bank in a more dovish posture than the analysts’ consensus (August 2016) and more hawkish than the market pricing (Q1 2016).
“Beyond delaying the first hike, we also take down the pace of normalization into 2016, finishing the year at 1.25% (slightly below the analysts’ consensus) against 1.75% so far,” says BofA’s Gilles Moec.
Why the First Hike will be delayed
The rationale behind the call is as follows:
- the market is understating the effect of the currently strong momentum in the real economy on inflation – in contradiction with February’s relatively hawkish Inflation Report – but also that
- the uncertainty which we expect the next general elections will create for 2016, with the doubts on EU membership and potential resumption of a fast pace of fiscal tightening, will affect the BoE’s attitude. BofA also consider that the BoE will want to lag behind the Fed, both in terms of pace of normalization and level of the policy rate
What about More Interest Rate Cuts?
While discourse over the future of UK monetary policy remains overwhelmingly biased towards interest rate rises we note the prospect of a rate cut remains.
Indeed, BoE Governor Carney did not shy from discussing further measures for easing were it to become necessary.
He reopened the possibility of either increasing asset purchases or further cutting Bank Rate, highlighting that from a financial stability point of view the banking sector was much better placed to cope with this than before.
“However the comments appeared merely to highlight the tools at their disposal in order to ensure the market knew they were not being complacent,” says Moec.
BofA say policy normalization in the UK, after the first rate hike, will be gradual with the policy rate reaching 1.25% in Q4 2016, down from the 1.75% forecast previously.
While this news plays negative for the GBP we should note that with other global central banks cutting rates competing currencies will find themselves under significantly more pressure, ensuring the pound's outlook remains positive.
