Share Tool

A BOE Rate Hike Is Highly Unlikely Anytime Soon 

Mike Riddell 

 

Mike Riddell

3/27/2017 

As sterling's devaluation starts to reach consumers, UK inflation could see a temporary bump upward this year. But Mike Riddell says political risks and other weak economic data make the market's expectations of a rate hike by summer 2018 seem ambitious.

Strength mixed with weakness

UK economic data have been surprisingly strong for a long time. The Citi UK economic surprise index has been above zero since mid-June 2016, showing a UK economy that has been consistently beating consensus forecasts. This run has now lasted longer
UK house prices are less strong and have even been falling in some ares of London
than the previous record run set in 2009, when expectations had reached rock bottom.

However, the most recent UK data have been weakening: UK house prices are less strong and have even been falling in some areas of London, and business surveys have been less robust – including the all-important purchasing managers index, which was below expectations in February.

Perhaps most crucially, there is still no sign of business investment picking up. Indeed, quite the opposite is true. As Bank of England Governor Mark Carney pointed out in February's quarterly inflation report, UK business investment today is no higher than it was in 2015. The strength of the UK economy lately has been driven by the consumer – and with UK savings rates so low, this is not sustainable.

In agreement with the BOE

We agree with the BOE's view on UK inflation. So far, the British pound sterling's devaluation has had a limited effect on consumer prices due to businesses hedging their currency exposure. As these hedges come off, inflation (as measured by the consumer price index) is likely to rise to at least 2.5% this year
Sterling's devaluation has had a limited effect on consumer prices
and possibly a little higher in 2018. This will cause real incomes to take a firm hit before inflation falls back as the temporary effects from weaker sterling and oil prices fall out of the year-on-year numbers.

Against this backdrop – particularly with economic and political risks escalating, including a Scottish independence referendum – we believe it is highly unlikely that the BOE will hike interest rates any time soon. Nevertheless, the market has fully priced in an interest-rate increase by summer 2018, although part of this market-implied inflation rate may be a risk premium.

We have been broadly supportive of UK government bonds over the last few months, and we have also been bearish on sterling. We expect the pound to continue to come under pressure as political risks mount and the cyclical strength of the last few months continues to weaken.


The material contains the current opinions of the author, which are subject to change without notice. Statements concerning financial market trends are based on current market conditions, which will fluctuate. References to specific securities and issuers are for illustrative purposes only and are not intended to be, and should not be interpreted as, recommendations to purchase or sell such securities. Forecasts and estimates have certain inherent limitations, and are not intended to be relied upon as advice or interpreted as a recommendation.



Allianz Global Investors Distributors LLC, 1633 Broadway, New York, NY 10019-7585, us.allianzgi.com, 1-800-926-4456.

Search

> Advanced Search

Find a Product

Or Select

Or Browse by

Contact Us

For all inquiries please contact us

Follow Us

       
Comment on this article
Market Insights 
125085  

Share

Facebook
LinkedIn
Twitter

You are currently leaving us.allianzgi.com and navigating to a third-party website. Allianz Global Investors Distributors LLC accepts no responsibility for content on third-party sites or for the services provided. When using the services provided by a third-party site, you are subject to that site’s terms of service and privacy rules, which you should review carefully.