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6 years since the Bank of England cut rates to 0.5%

At noon the Bank of England’s Monetary Policy Committee (MPC) will announce if there is a change to interest rates or the asset purchase programme. The current base rate is 0.5% and today’s announcement marks six years since the MPC cut interest rates to the record low. The expectation is a vote for rates and QE (£375bn) to be left unchanged.

The Bank of England’s MPC remit is to target 2% inflation, over the last few years the economy consistently overshot as the economy contracted and rates were cut.  CPI in January fell to the lowest level since 1989, with the UK economic recovery in full swing. Indicators reported by Markit, were better than expected PMI numbers for manufacturing and construction, with a slight miss for services.

The consensus expectation is that the MPC will begin tightening with a 25bps rate hike in Q1 2016, however the argument for movement sooner is that the UK could be left without any tools to fight deflation. If the MPC doesn’t begin to start increase interest rates to more normal levels, the central bank would be left with limited options to guide the economy if rates remain at the record low.

The later the MPC waits to start hiking rates, the faster the pace of increases will need to be. The bank has regularly communicated that the hike will be “gradual”, which should require the start of tightening, sooner rather than later. 

House prices

A statistical release from a UK bank, the Halifax House Price Index, reported a slight decrease on a monthly basis of -0.3%, however the smoother 3 month figure was +2.6%. Property price growth has outpaced wage inflation, with the disparity widening at an alarming pace. Prime high end property has become a safe haven investment, becoming a major export to the elite of BRIC nations. There is a concern that when rates are normalised the increase in monthly repayments for millennials will squeeze disposable income which could stall or reverse any recovery.

Labour market conditions

The CIO of fixed income at Blackrock speaking on Bloomberg believed that the Bank of England should pull their first rate hike forward to August. His focus is that the labour market has tightened, and this is the signal to begin hiking. An interesting fact was that there are now 10 job seekers for 9 vacancies, the last time that the employment market was like this, base rates were 5.25%. As the employment market tightens, employers are forced to increase salaries to entice employers, which should push inflation higher. 

GBPUSD: 1.5246

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