UK Economic Update – 18 May 2015
UK employment and earnings indicators extend gains in April as BOE signals it will look through “temporary” disinflation
Manufacturing production in the UK bounced back slightly during March according to lagging survey data released last week, although since this time, activity within the sector appears to have slowed somewhat if recent Markit PMI surveys are anything to go by.
Average earnings growth extended the previous months gains during April according to other survey data released last week, while the unemployment rate also fell further, down to 5.5%.
In the BOE’s quarterly inflation report the UK’s rate setters once again described the key drivers behind British disinflation as transitory, or temporary in nature, before reiterating that the monetary policy committee would look through these influences when determining policy.
The bank also reiterated its earlier expectations that inflation is likely to recover sharply toward the close of the year as the 2014 oil price decline begins to drop out of the comparative period.
All of this bodes well for interest rate hawks or those simply hoping to secure a better rate upon their savings some time in the near future. However, we also caution that a 2015 lift off in UK rates will be entirely contingent upon whether or not the Q1 softness in growth begins to fade as we approach the close of Q2.
Current market prices point toward an initial hike in April 2016 however, some forecasters have brought forward their projections into Q4 of 2015.
If these more hawkish observers prove to be correct in their predictions then it is possible that we could see the BOE become the first central bank to hike rates, particularly if US domestic consumption continues to disappoint and the FOMC remains on a cautious footing.
Such a scenario could potentially see the BOE hiking in November and the Federal Reserve following closely behind in December.
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Looking ahead
The headline events for the week ahead will without doubt be the release of inflation figures for April. While official estimates suggest that consumer prices will have remained flat during the month, we are moderately more optimistic.
This is as after several months of more elevated oil prices and taking into account the weakening of sterling in the run up to the election, we believe that we will now see some of the price acceleration that has skipped over the UK in favour of the European and North American economies during recent months.
If we are right in this belief then we would also expect a positive reaction from sterling and potentially, a deeper pullback from the FTSE 100 as the threat of higher rates comes back to the fore for UK investors and traders.
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