The Bank of England minutes for the MPC meeting ending on the 3June recorded that the committee voted unanimously (9 – 0) to leave interest rates unchanged at 0.50% and asset purchases (QE) at £375bn. Lower inflation is likely to dissipate, which is in line with previous comments from Mark Carney comments that the slowdown in inflation was transitory due to the sudden fall in energy prices. Any change from the MPC member voting from 9-0 would be seen as a signal that monetary policy tightening is insight. The current market expectation is for the first rate hike to come in the first quarter of 2016.
Average hourly earnings
The latest Labour Market reading from the ONS, estimates the unemployment to be 5.5% constant with analyst expectations. The highlight of the report is the increase in average hourly earnings, up by 2.7% compared with 2.2% expected. The increase in earnings, alongside the lower unemployment rate should put pressure on prices to move higher. The inflationary pressures signal the need for the MPC to vote for tightening, to ensure that CPI doesn’t overshoot the 2% target.
The chart at the top of the page (Figure 6.1) from the ONS shows the growing disparity between CPI and income. On Tuesday the CPI reading was 0.1%, the uptrend in average earnings should see CPI start to trend higher.
As the macro data was released, Sterling rallied to a 4 week high against the US Dollar as traders believed the data was a positive for the pound, and the timing of the first rate hike. The Fed is expected to start tightening in September, as this draws closer, the expectations for the BoE could be brought forward if the economy continues to perform.
FTSE 100: 6,713