One Bank of England hawk does not a rate rise make
Christine Johnson, head of fixed income at Old Mutual Global Investors, comments ahead of the Bank of England’s policy decision and Quarterly Inflation Report on Thursday:
Its seems highly likely that at least one – and possibly two – members of the Monetary Policy Committee will vote this week to raise interest rates, but we've been here before. There is still quite a lot of road to travel before we arrive at a rate hike, and the question remains: at what speed is the UK economy moving? To study the form for a moment, higher GDP, consumer spending and earnings growth all support rate increases. Yet on the side of rates remaining 'lower for longer,' unemployment, the pound and productivity have all picked up, too. Meanwhile, coming in on target are all-important inflation expectations, CPI data and mortgage growth.
While most members are unlikely to countenance tightening policy while the economy flirts with deflation, the Bank of England's job is to look ahead. Doing so in a consistent manner is something the Governor, Mark Carney, has wrestled with in the past. To be consistent now, the Inflation Report should set the scene for a recovery in inflation and a rate rise in early 2016.
We’re happy to be underweight UK duration to position for this, even as the current evidence is fairly equally weighted. Still, a 'downside surprise' such as a sudden lurch back into recession seems less likely. And as we’ve already seen a collapse in inflation, the balance of probabilities sits with a progressively more hawkish MPC.