Cautious MPC still likely to wait until well into next year

Interest rate expectations and the pound have both risen over the last month as stronger pay figures and signs that the US Fed is just a couple of months away from raising interest rates have bolstered expectations that the MPC could follow suit about the turn of the year. Indeed, Mark Carney’s recent speech seemed to endorse the markets’ recent decision to fully price in the first rise in interest rates in Q1 2016. We admit that the chances of a rate rise within the next six months have grown. But with productivity now recovering, core inflation unlikely to pick up over the next nine months and the fiscal squeeze tightening again, we still think that the MPC is more likely to be cautious and hold off raising rates until Q2. Regardless of the exact timing of the first hike, however, the subsequent tightening of monetary policy still looks set to be extremely gradual by past standards.