The first rate hike of a major global central bank is seemingly approaching. All along the market had been talking about the US Federal Reserve being the first mover, however could it be that it is not the Fed after all, but the Bank of England that is the first to hike? The meeting minutes just released do not appear to suggest that is the case.
The Bank of England again has kept interest rate steady at 0.5%. However, as part of what has been dubbed as “Super Thursday” (and no I am not talking about the cricket, which is also true), the Bank of England has also released the minutes from its meeting at the same time as the monetary policy announcement. The meeting has shown a dissenting voice in the nine voting members.
Ian McCafferty has voted for a 25 basis points rate hike to take rates to 0.75%. However, this is actually a disappointment for the sterling bulls. Consensus had suggested that McCafferty had been expected to be joined by Martin Weale in voting for a rate hike. However, the more optimistic hawks in the market suggested there could have even been three dissenting voices, with David Miles also potentially having voted for a hike in his final meeting. This was not the case though and the fact that only one MPC member was willing to vote for a hike was a significant blow for the hawks. This comes as Martin Weale has consistently been erring towards a possible hike in his recent rhetoric.
It would appear to be inflation that continues to be a drag on a potential rate hike, as real wage growth moves to around 3%, whilst the minutes from the meeting suggest that as much as 1.5% is being taken off CPI due to low levels of food and energy costs. These aspects do remain fairly short term in nature though, with core inflation of around 1% remaining fairly stable, although it is not showing any real signs of picking up quite yet (despite the wage growth that is currently being enjoyed). The minutes also point to the fact that the strength of sterling in recent months has also been disinflationary (whilst the level of spare capacity is still dragging around 0.5% off GDP).
Prior to the decision, the market for Short Sterling Interest Rate futures had been pricing in a rate hike possibly as early as December. However, the market is already reacting to the minutes by pushing back expectations. It would suggest that a Q1 2016 rate hike is still possible.
The recent comments from FOMC members have been mixed, but it still seems as though the Fed is likely to be first mover. It would appear that Atlanta Fed President Dennis Lockhart is moving firmly into the September hike camp, however could the comments from Jerome Powell (Board of Governors) be telling of a more relaxed majority amongst the FOMC? The economic data has been mixed of late and the two Employment Situation reports (Non-farm Payrolls) that come before the September rate decision (the first tomorrow) would need to show big jobs growth (at least over 250,000 if not above 300,000) whilst earnings growth beginning to come through. In the absence of this I feel that it would be unlikely still that the Fed would go before December.
So with the Bank fo England still erring on the side of caution it would seem likely that it would be early 2016 at the very earliest. I think that the Fed will move in 2015 (most probably December), so that means that I still see the Fed as the first mover, with the Bank of England following probably in February with the first inflation report of 2016.
Sterling/Dollar has not taken the dovish news especially well. It has fallen around 100 pips since the announcement. The key near term support remains $1.5450/$1.5470 which could come under pressure now. I have been looking for a catalyst to get Cable moving, perhaps we have now got one.