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Scott Jamieson, Kames Capital

Door closes on Bank of England’s opportunity to lift base rates

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Scott Jamieson (pictured), head of multi-asset at Kames Capital reacts to the Bank of England’s latest Quarterly Inflation Report…

The door has all but closed on the Bank of England’s opportunity to lift base rates. As the latest Quarterly Inflation Report (QIR) makes clear “inflation is expected to remain below the target in the near term, and is more likely than not to fall temporarily below 1% at some point over the next six months”. This represents a material change from the QIR released in August, and validates the downshift seen in market implied inflation rates.
 
The problem, it seems, is everyone else. While UK domestic demand has strengthened, the external outlook has weakened; the Europeans being most to blame. The slide in oil prices has added to the downward pressure on overall prices, with the fillip to consumer spending yet to be very evident.
 
There will inevitably be some focus on the improvement in wage data also announced this morning: wage rates rose 1.3% and the ranks of employed rose by 112,000. However the QIR reminds us that there is “considerable uncertainty around both the current degree of (labour market) slack and its likely evolution, and there is a wide range of views on the Committee”. In other words, labour market trends alone will not be sufficient to bring the MPC the strong consensus needed to raise base rates.
 
Financial markets have been responding to the diverging trends between the improving US economy and the rest by re-rating the dollar. Today’s QIR moves sterling closer to the rest.

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