9 October 2015

Interest rates: plus ça change

Current market pricing implies a lift off in early 2017 for UK interest rates; more than six months after the Fed.


In contrast, the view of the research team at JM Finn & Co concurs with Global Macro Strategist, Neil MacKinnon of VTB Capital, who still feels that the Fed may try to sneak in a Q4 2015 hike, should any amelioration in Chinese data allow it. At present, market pricing from the bond futures curves also implies that the Fed may have hiked twice before the UK’s MPC even acts. 

In my view, increasing signs of reflation and strength in the UK housing recovery make this scenario look a tad extreme. This view incorporates a theory that was debunked some eighteen months ago, namely that it would be self-defeating to hike rates ahead of the Fed, given that this might cause a bout of currency appreciation, stifling inflation in the process.

I think the increased likelihood of reflation within the UK, still leaves the door open for Governor Carney to act in February 2016, ahead of current market indications, should local conditions mitigate it. Do note that faced with a zero interest rate policy and in direct contrast to the US, the UK’s domestic reflation story is feeding through into rising unit labour costs and a tightening labour market feeding into rising pay. Frankly it looks pretty debatable from here that any UK hike would create that great an appreciation in the currency, given that it would be coupled with a concomitant commitment to a shallow path in rates.

We have been here before eighteen months ago, with the UK seen as an increasingly early easer within Europe, and I reiterate that local conditions and increasing UK reflation, as seen in the pick-up in UK grocery conditions, may put pressure on the MPC to hike again, irrespective of any timidity from the Fed. At the very least, I think that this debate will open up again in policy circles.


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