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UK: Rate hike expectations delayed to H2 2016 - Rabobank

FXStreet (Delhi) – Research Team at Rabobank, suggest that after having gradually dismissed speculation of a 2015 rate rise, economists now see risk of the first rise next spring though the money market is currently not fully priced for a 25 bps move until H2 2016.

Key Quotes

“The bursting of China’s stock market bubble this summer and the devaluation of the CNY focussed the market’s attention on slowing growth in China. UK exporters can add this concern to their list of headwinds which has been dominated in recent years by fears related to slow growth in the Eurozone; the UK’s largest trading partner.”

“These worries have been brought into focus by the fact that the UK’s effective exchange rate is currently trading around 7% firmer than its level at the start of the year. Unsurprisingly the combination of a tough export environment and sterling strength has begun to take its toll on the UK economy, giving weight to the argument that the BoE needs to be in no hurry to hike rates.”

“UK manufacturing production dropped by a worse than expected -0.8% m/m in July. This data release coincided with news of a wider than expected July trade deficit. UK exports of goods decreased by £2.3 billion to £22.8 billion in July 2015, the lowest export figure since September 2010.”

“Although BoE Governor has made it clear that the next move in UK rates is likely to be to a tightening, he is sitting on the fence in terms of the timing by repeating the view that the factors that will dictate the policy decision will come into sharper focus at the end of 2015. All year we have pointed to May 2016 at the likely timing for the first rate hike. Currently, the risks of a delay until next August appear to be heightened.”

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