12 Feb 2015
Today’s BoE’s inflation report may be mildly hawkish - ING
FXStreet (Barcelona) - James Knightley, Senior Economist at ING, notes that BoE Inflation Reports have been relatively dovish in recent quarters, but today’s report see’s some scope for mild hawkishness despite the current absence of inflation.
Key Quotes
“The last three Bank of England Inflation Reports have been interpreted dovishly by financial markets. Following the November report and press conference the 10Y gilt yield fell 5bp with the broad sterling exchange rate dropping 0.6%. In August the falls were 4bp and 0.9% respectively, while in May it was 10bp and 0.4% respectively.”
“Given that the minutes to the January MPC meeting showed both Martin Weale and Ian McCafferty switching back to voting for no-change after previously voting for a 25bp hike, there is the potential for today’s events to be seen as fairly dovish.”
“However, we think that in this instance there is the potential for a relatively hawkish outcome.”
“It is important to remember that the BoE does not focus on inflation as it currently stands, but instead on where it is likely to be in 2 years’ time.”
“In this regard, the key line in the January MPC minutes was that “risks to CPI inflation in the medium term might have, if anything, shifted to the upside”.”
“Consequently, there is the possibility that inflation is predicted to be above the 2% target in 2 years’ time based on current market interest rates. After all the growth outlooks decent, wages are starting to rise and energy prices appear to have stabilised. Such a development would offer support to our view that the BoE will hike rates before the end of the year.”
Key Quotes
“The last three Bank of England Inflation Reports have been interpreted dovishly by financial markets. Following the November report and press conference the 10Y gilt yield fell 5bp with the broad sterling exchange rate dropping 0.6%. In August the falls were 4bp and 0.9% respectively, while in May it was 10bp and 0.4% respectively.”
“Given that the minutes to the January MPC meeting showed both Martin Weale and Ian McCafferty switching back to voting for no-change after previously voting for a 25bp hike, there is the potential for today’s events to be seen as fairly dovish.”
“However, we think that in this instance there is the potential for a relatively hawkish outcome.”
“It is important to remember that the BoE does not focus on inflation as it currently stands, but instead on where it is likely to be in 2 years’ time.”
“In this regard, the key line in the January MPC minutes was that “risks to CPI inflation in the medium term might have, if anything, shifted to the upside”.”
“Consequently, there is the possibility that inflation is predicted to be above the 2% target in 2 years’ time based on current market interest rates. After all the growth outlooks decent, wages are starting to rise and energy prices appear to have stabilised. Such a development would offer support to our view that the BoE will hike rates before the end of the year.”