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UK CommentData supports rate hike in May from the Bank of England

  1. Labour market data stronger than market expectations
  2. New information overall in line with BoE expectations
  3. No change to policy tomorrow, but watch for possible hints of a May hike
Labour market data stronger than market expectations
Labour market data came in on the strong side of expectations today. The unemployment rate in the three months to January fell back to 4.3 percent after having increased to 4.4 percent in December. Employment growth was much stronger than expected increasing by 168k (consensus 84k), up from a weaker-than-expected reading of 88k the month before. Total pay growth picked up to 2.8 percent y-o-y, beating the market consensus of 2.6 percent. Regular pay (excluding bonus payments), increased to 2.6 percent from 2.5 percent the month before, in line with consensus. The Bank of England (BoE), in its February Inflation Report, expected the unemployment rate to stay unchanged at 4.3 percent in the near term and expected regular pay growth to pick up to 2 ¾ percent during H1 of this year. Labour market numbers so far seem well in line with the BoE’s near-term expectations.
New information overall in line with BoE expectations
Consumer price inflation was lower than expected this week with the 12-month growth rate in the CPI down to 2.7 percent in February from 3.0 percent in May. The market consensus was 2.8 percent and the BoE had 2.9 percent. Core inflation was 2.4 percent in February (consensus 2.5 percent), down from 2.7 percent in January. Producer price inflation was also weaker than market expectations in February with the 12-month growth rate in PPI input down to 3.4 percent (consensus 3.8 percent) from 4.5 percent in January and PPI output inflation down to 0.0 percent in February (consensus 0.1 percent) from 0.1 percent in January. It seems clear now that consumer price inflation has passed its peak and is heading south. The BoE had expected CPI inflation to decelerate from 3 percent in January to 2.9 percent in February and 2.8 percent in March. However, while the February CPI reading was below the estimate of the BoE, monthly numbers can be volatile and it is too early to conclude that inflation is decelerating faster than the BoE expected, in our view. UK GDP growth was revised down to 0.4 percent in Q4 after growing 0.5 percent in Q3. Economic sentiment has retreated slightly in early 2018, but remains rather robust, suggesting that GDP growth could hold up in the near term. The BoE expects GDP growth in Q1 of 0.4 percent, which seems well in line with sentiment indicators. When it comes to Brexit, the UK and the EU have managed to agree on a transition deal, which was the most important hurdle in the short term.
No change to policy tomorrow, but watch for possible hints of a May hike
The Monetary Policy Committee (MPC) of the BoE will meet tomorrow, with its decision due to be released at 13:00 CET. Minutes from the monetary policy meeting will also be released. At its meeting in February, the MPC indicated that the bank rate might have to be increased faster and to a greater degree than the market expected at the time. Given the hawkish signals from the BoE we have forecast a rate hike in May. There is limited economic news since the MPC meeting in February, but data so far supports a rate hike in May, we believe. Since the February MPC meeting, UK interest rates expectations have increased somewhat and the market currently prices a probability of 65 percent that the bank rate will be hiked in May. By the end of 2020 three hikes are expected by the market. We expect no change to monetary policy at this week’s meeting, but it will be interesting to see how the BoE describes the economic outlook and if it further encourages market expectations for a May interest rate hike.


Source: Macrobond



Kari Due-Andresen

Chief Economist Norway

Norway and UK

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