The Bank of England decided to leave monetary policy on hold today at 0.5%.
The Bank Rate remains as it has since March 2009, with only one member calling to increase it at the Monetary Policy Committee's (MPC) latest meeting.
Axa Investment Managers (Axa IM) concluded today that November 2016 is now the most likely time for the MPC to increase rates.
The meeting’s minutes noted that there had been “muted” reaction to the Federal Reserve’s recent rate rise, but discussed the impact of declining Chinese equity markets and a re-focus on the Chinese yuan.
The MPC’s attention focused on the sharp declines in oil and the 3% fall in trade-weighted sterling, compared with the 15-day moving average included in the November Inflation Report, said David Page, senior economist at Axa IM.
The BoE's Asset Purchase Facility quantitative easing target remained at £375bn.
Leaving the monetary policy on hold today was the expected decision, Axa IM's Page said.
“Minutes were cautious following a torrid start to the year and reviewed the global risks as well as more direct implications from falling oil prices and trade-weighted sterling,” he said.
Given the weaker inflation outlook, Axa is shifting its outlook for the first Bank Rate hike from the second quarter of 2016.
“The precise timing will depend on the future path of commodities and sterling and the timing of the EU referendum,” said Page.
“We suggest November 2016 is now the most likely time for the MPC’s first move, reducing our expected hikes in 2016 to just 0.25% from 0.5%.”
The MPC has lowered its economic growth forecasts for 2015’s fourth quarter and 2016’s first quarter.
It was also predicted a “dampening effect” on the housing market following the latest budget announcements from the UK’s Chancellor of the Exchequer on buy-to-let properties, according to the MPC meeting's minutes.
“The committee considered the inflation outlook in the context of oil, sterling and wage developments. Oil moves were likely to “moderate the extent” inflation would rise in the coming months, but sterling would “add somewhat to imported cost pressures,” said Page.
The moderation in average earnings growth to year-end, relative to the pick-up to 3% around mid-year was also highlighted, he noted.
The meeting also considered the prospect of weaker inflation and falling average weekly hours potentially knocking the growth of wages.
There were signs of slowing inflation this December, but inflation, “could be expected to pick up materially further in H2 2016 and early 2017”.
“In broad terms, the BoE faces a juggling act of weak short-term inflation – made weaker by the fall in oil and other commodity prices; and
Page argued that recent market moves have increased the chance of stubbornly low headline inflation that Axa believes will make a second quarter rate rise now unlikely.
“However, medium-term considerations should keep the bank projecting inflation returning swiftly to target as commodity price base effects unwind,” said Page.
There is also considerable uncertainty surrounding the UK’s upcoming Brexit referendum.
A rate rise in the second half of 2016 will be influenced by the referendum on EU membership.
“At this stage, we think referendum uncertainty is likely to persist over the summer and we now forecast the MPC to tighten monetary policy in November of this year,” said Page.
“However, we warn that a swifter than anticipated rebound in oil, or early referendum could see this hike come sooner.
“This remains ahead of the market consensus, which is now looking at a rate rise not until 2017’s second half,” he added.
The financial markets reacted to the news, with two year and
Sterling also rose slightly to £0.756 (from £0.76) to the euro, but was only marginally higher to the US dollar at $1.44.