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UK: Encouraging signs – ING

FXStreet (Barcelona) - James Knightley, Senior Economist at ING sees the risks skewed towards a slightly earlier policy tightening.

Key Quotes

“One of the key take-aways from yesterday’s Bank of England Inflation Report was Governor Mark Carney acknowledging that he may have to write a letter to the Chancellor explaining why inflation has deviated so far from target.”

“The BoE indicated that it believes there is a strong chance that sharp falls in food, energy and some import prices could push CPI below 1% in the near-future. However, the BoE is confident that this would be “temporary” and that it will return to target by the very end of the Bank’s forecast period. Carney described the risks surrounding the forecast as “balanced”.”

“Altogether, the BoE appears to remain reasonably upbeat on the UK’s prospects, but is in no hurry to raise rates. Indeed, a sub-1% inflation situation gives it room to leave policy loose for now, but we suspect that the positive growth and labour market story will gradually prompt more and more members to vote for policy tightening early next year.”

“We look for the first rate hike to come soon after the 7 May General Election, but policy tightening will be slow and steady with rates unlikely to reach 2.5% before early/mid 2017 given high indebtedness and wide lending spreads.”

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