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    Bank of England: GDP report and rate-increase

    Preliminary report on the UK economy in the second quarter, published this week, has lived up to expectations. Quarterly growth accelerated from 0.4% to 0.7%. At the same time, the annual growth rate slowed from 2.9% to 2.6%, continuing to correct from the nine-year high of 3.4% y/y, registered in the last quarter of last year (see the Chart). However, despite this slowdown, the United Kingdom, seems, to have kept its leading positions in the second quarter in terms of economic growth among the major economies of the world.

    euro-area-core-inflation-rate29-7-15

    Investors are most concerned how this report affects the beginning of monetary policy tightening cycle by the Bank of England. The thing is that this significant event is not going to happen any time soon – after all, we remember the recent statement by the British central bank Governor Mark Carney that “the outlook for the first interest-rate increase will become clearer toward the end of this year”. Therefore, there won’t be any hikes until the first quarter of 2016. And by that time the Monetary Policy Committee (MPC) will already have data on GDP growth in the country, not only for the second, but the third, and perhaps even for the fourth quarter. And this updated information can significantly alter the Central Bank’s assessment and future plans…

    Besides, it is important to understand that the GDP – is not the only indicator, which will be considered by Mark Carney and his colleagues at the MPC. Inflation, wage growth, housing market dynamics, employment, labor productivity – all these factors that guide the Bank of England will be taken into account when deciding on the date of the first rate hike.

    However, I believe, that current situation is favorable for the beginning of the tightening cycle in the first quarter of next year so far.

    • The economy, which has been demonstrating growth of over 2.5% y/y for a year and a half can afford to move away from ultra-low interest rates.
    • The Bank of England isn’t scared by the weak inflation: the leadership is confident and expect sharp acceleration of price growth early next year.
    • Salaries reached the highest growth rates since 2010 – 3.2% y/y in May (and this is on the back of zero consumer inflation!).
    • Unemployment at 5.5-5.6%, registered in the UK this year, corresponds to the pre-crisis 2006, which means that the UK labor market has almost fully recovered from the global economic crisis.
    • Productivity has reached the level of 2007 and is expected to keep growing.

    As for the home prices, according to the Office for National Statistics, they are gradually decreasing from the peak levels of the last year, which soothes concerns about the possibility of a “bubble” in the UK housing market. So this factor can be considered as neutral in terms of impact on monetary policy.

     

    So I continue to stick to my earlier forecast that the first rate-increase by the Bank of England will take place in the first quarter of 2016.

     

    Dear traders, please post your comments to our forecasts and share your own opinion. Your ideas can be very helpful for the newcomers in the forex market. Thank you!

    Preliminary report on the UK economy in the second quarter, published this week, has lived up to expectations. Quarterly growth accelerated from 0.4% to 0.7%. At the same time, the annual growth rate slowed from 2.9% to 2.6%, continuing to correct from the nine-year high of 3.4% y/y, registered in the last quarter of last year (see the Chart). However, despite this slowdown, the United Kingdom, seems, to have kept its leading positions in the second quarter in terms of economic growth among the major economies of the world.

    euro-area-core-inflation-rate29-7-15

    Investors are most concerned how this report affects the beginning of monetary policy tightening cycle by the Bank of England. The thing is that this significant event is not going to happen any time soon – after all, we remember the recent statement by the British central bank Governor Mark Carney that “the outlook for the first interest-rate increase will become clearer toward the end of this year”. Therefore, there won’t be any hikes until the first quarter of 2016. And by that time the Monetary Policy Committee (MPC) will already have data on GDP growth in the country, not only for the second, but the third, and perhaps even for the fourth quarter. And this updated information can significantly alter the Central Bank’s assessment and future plans…

    Besides, it is important to understand that the GDP – is not the only indicator, which will be considered by Mark Carney and his colleagues at the MPC. Inflation, wage growth, housing market dynamics, employment, labor productivity – all these factors that guide the Bank of England will be taken into account when deciding on the date of the first rate hike.

    However, I believe, that current situation is favorable for the beginning of the tightening cycle in the first quarter of next year so far.

    • The economy, which has been demonstrating growth of over 2.5% y/y for a year and a half can afford to move away from ultra-low interest rates.
    • The Bank of England isn’t scared by the weak inflation: the leadership is confident and expect sharp acceleration of price growth early next year.
    • Salaries reached the highest growth rates since 2010 – 3.2% y/y in May (and this is on the back of zero consumer inflation!).
    • Unemployment at 5.5-5.6%, registered in the UK this year, corresponds to the pre-crisis 2006, which means that the UK labor market has almost fully recovered from the global economic crisis.
    • Productivity has reached the level of 2007 and is expected to keep growing.

    As for the home prices, according to the Office for National Statistics, they are gradually decreasing from the peak levels of the last year, which soothes concerns about the possibility of a “bubble” in the UK housing market. So this factor can be considered as neutral in terms of impact on monetary policy.

     

    So I continue to stick to my earlier forecast that the first rate-increase by the Bank of England will take place in the first quarter of 2016.

     

    Dear traders, please post your comments to our forecasts and share your own opinion. Your ideas can be very helpful for the newcomers in the forex market. Thank you!


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