MPC may not wait as long as markets expect

In the space of just three months, UK markets have pushed back their expectations for the first rise in official interest rates from February to November 2015. This may turn out to be an overreaction – the recovery has only lost a little pace, while the fall in inflation has largely reflected the impact of lower import and commodity prices which the MPC is likely to “look through”. At the same time, slack in the labour market has declined and pay growth now seems to be on a strengthening trend. And while the Governor struck a dovish tone at November’s Inflation Report press conference, the minutes of November’s MPC meeting suggested that it might not take much strong news on wages or growth for other members to join the two already voting to raise rates. As a result, we still think that by the end of the second quarter, the MPC is likely to have raised interest rates. Nonetheless, subdued inflation, high debt levels and the re-intensification of the fiscal squeeze next year should mean that the MPC is cautious and raises Bank Rate perhaps to just 1.5% by the end of 2016.