Regarding the latest decision on interest rates, senior economist at Julius Baer David Meier said: “At yesterday’s December meeting the BoE’s Monetary Policy Committee (MPC) was not in the mood to rattle markets out of their comfort zone before the holiday season”. Societe Generale and Canada’s RBC Capital Markets have both recommended selling sterling in the past week, the French bank predicting the pound may fall as low as $1.30 if voters vote in a referendum to leave the EU.
Advertisement
By contrast, traders are more evenly split, meaning there is a risk of currency volatility whether the central bank cuts or holds the OCR at 2.75 percent.
The MPC left the bank rate unchanged at 0.50% and stocks of purchased assets at GBP375bn.
Official figures earlier this week revealed that manufacturing output dropped by 0.4 per cent month-on-month in October – worse than expected and a sharp reversal of the 0.9 per cent rise in September.
The rates market is not pricing in a hike until late 2016, and the GBP has been one of the weaker G10 performers since the last BoE meeting. Nevertheless, core inflation remains subdued, and CPI inflation is expected to stay below 1% until the second half of next year.
They also highlighted a levelling off in wage growth in Britain, something which is central to the Bank’s deliberations on when interest rates need to rise.
On the employment front, the number of persons employed has increased steadily, and in October the unemployment rate fell compared to that in October of past year while the employment-to-population ratio maintained the same level. Ian McCafferty preferred to increase Bank Rate by 25 basis points, given his view that the path of domestic costs was more likely to lead to inflation exceeding the target in the medium term than was embodied in the Committee’s collective November projections. Despite lower unemployment, nominal pay growth appears to have flattened off recently, the bank noted. “And we have to admit making a similar comment a year ago, regarding interest rates being likely to start inching up in 2015”, Howard Archer at IHS Global Insight said in a note on Friday.
US interest rate futures implied traders are pricing in about a 78 percent chance that USA policymakers will raise rates for the first time in nine years next week, according to CME Group’s FedWatch programme.
Advertisement
How much financial conditions tighten and, particularly, how much more the dollar rises will also determine how quickly the Fed will be able to follow up on its first hike.
