The Bank of England has the enviable position that the UK economy is growing and needs to time the exit of ultra-loose monetary policy. Interest rates have been at the record low (0.50%) for over 5 years, and the economy is in recovery mode. The majority of economists are pencilling in a rate rise for Q1/2 in 2015.
How is the economy doing?
- 3% for 2014 and 2.4% in 2015 (Confederation of British Industries)
- 2.9% for 2014 and 2.7% in 2015 (NIESR)
- UK ILO Unemployment rate is 6.9% (April ONS Labour Market Statistics)
- Consumer Price Index (CPI) 1.6% in March down from 1.7% in February
- Retail Price Index (RPI) 2.5% in March down from 2.7% in February
- In 2013 prices nationally grew just 1.3% (OECD)
- Concerns of a price bubble in London, rise in prices is significantly outpacing growth in incomes, with the Capital being its own micro economy
The BoE focus has been on the slack in the Labour market (spare capacity), there is concern that there is a big issue with underemployment and output, justifying the record low rates. If inflation (CPI) was still above the central banks 2%, then the argument for an increase would be louder. The likelihood is that the BoE beginning signalling before the end of 2014 as to when they will raise rates, most likely in the first half of 2015. This raise would be on the basis that the possitive macro data continues and that inflation above the banks target doesn't return in the near term.
Bank of England Inflation Report
Traders will be watching closely to see if the positive macro data has swayed the BoE sentiment, bringing the first rate hike closer than currently predicted.
At time of writing GBPUSD is 1.6890