BoE First Rate Hike Seen by the End of 2016

Bank of England's key rate has been at 0.5 percent for more than six years and is likely to remain steady until the end of 2016, as inflation rate remains well below 2 percent target and growth outlook has weakened. Indeed, market predictions from to the Bank of England's quarterly Inflation Report point to an interest rate of 1.1 percent by the end of 2016, 1.7 percent by the end of 2017 and 2.3 percent by the end of 2018.

The economic growth has been losing momentum
Quarterly output growth in the United Kingdom has fallen back to 0.5 percent in the third quarter of 2015 from a peak of 0.9 percent in the second quarter of 2014 and staying slightly below market expectations of 0.6 percent. As construction declined and manufacturing remained depressed, consumer and investment demand remained the main drivers of growth.

Inflation will only return to the 2 percent target in 2 years
Annual inflation rate was recorded at -0.1 percent in October, the same as in September, due to lower prices of food and fuels. It was the first time in half a century CPI have fallen on an annual basis for two months in a row. Meanwhile, annual core inflation rate which exclude volatile components such as food and energy prices was recorded at 1.1 percent, reflecting the impact of falls in import prices, which have affected the prices of many goods and services.

Household consumption remains strong amid higher incomes
Household consumption, which is the largest component of GDP expenditure, has been boosted by a strong growth in real incomes. Overall average wages rose by 3 percent year-on-year in September 2015, compared with a 1 percent growth in the same month of the previous year, which along with employment growth and falls in energy, food and import prices has supported an increase in real income levels. Despite the pickup in wage growth, it remains below its pre-crisis average rate. The introduction of a National Living Wage next year is also likely to add to wage growth over coming years, still its impact on average wage growth is estimated to be very small. 

Consumer confidence is still holding
The overall GfK measure of consumer confidence has fallen slightly since the summer, due to the recent volatility in financial markets. Still, the index overall and most of its components are higher than a year ago, but households' expectation for the economic outlook over the next 12 months has deteriorated. 

Housing market continues to recover
While activity in the housing market remains subdued relative to pre-crisis levels, it has been gradually picking up, supported by lower mortgage interest rates. Having fallen back during 2014, mortgage approvals for both house purchase and remortgaging have risen over the past six months. House prices have been growing steadily.

Joana Ferreira |
11/26/2015 7:22:30 PM