On Monday, Britain’s manufacturing PMI jumped to 55.5 for October, ahead of analysts’ expectations of 51.3, which is one of the largest rises since the survey began over 20 years ago.
In the wake of a Chinese currency devaluation, continued rise of the dollar and emerging market worries, Mark Carney, Governor of the Bank of England, and Janet Yellen, Chair of the Board of Governors of the Federal Reserve System, have remained focused on the first rate increases, in their respective jurisdictions, since the financial crisis.
Investec Bank and HSBC Holdings Plc are expecting Kristin Forbes to join Ian McCafferty, currently the most hawkish member of the committee, in voting for an immediate rate rise. Martin Weale, who has previously voted for an immediate rate rise, is the other member of the MPC who may join the hawks. However, market makers are currently pricing in the first full rate rise in April 2016, according to Sterling Overnight Index Average (SONIA), which had previously marked the first full rate rise for December 2016 in the aftermath of the recent market correction.
Ross Walker (of Royal Bank of Scotland) noted that the MPC’s communication would be very tricky as they wouldn’t wish to be seen supporting the markets dovish, lower rates, expectations. The most recent focus has been on core inflation figures which have remained close to zero as unemployment has continued to decline and wage inflation, driven by a shortage of skilled workers, are providing policy makers with robust data to support their more positive economic outlook.
Sterling has decreased against the dollar during the oil price collapse and ought to have dampened some of the disinflationary pressure, however, as recently as September, the UK’s Consumer Price Index dropped into negative territory. In the short term a decrease in prices has a positive impact on disposable income. Coupled with increasing wages, this has provided some relief to consumers at the end of the month.
Following the Bank of England’s decision to flood the market with liquidity, via quantitative easing, the MPC now expect to reach their inflation target of 2pc within three years, and this week are due to release the November Inflation Report.
It is worthy of note that Kristin Forbes, has recently said in a speech at the Brighton Summit 2015 that much of the “doom and gloom” surrounding emerging markets had been “overstated” and that recent “news on the international economy” had not changed her expectation that rates would “rise sooner rather than later”. This week also sees the External MPC Unit, (of which Kristin Forbes is a member), submit a discussion paper aimed at improving inflation estimates as sterling reacts to market shocks.
Over the past couple of months the market has been warned by our policy makers that interest rates are going to rise. The Federal Reserve are likely to lead the way in the coming months and the MPC may take confidence from a positive market reaction. Traditionally, The Federal Reserve and The MPC increase or decrease interest rates by 0.25% but there has been long standing communication from both US and UK policy setters that interest rates, when they do begin to rise, they will rise slowly and gradually.
Since becoming Governor of the Bank of England, Mark Carney has attempted to provide clearer communication where it has been possible and as we move into a rate hiking cycle (where interest rate increases of 0.25% bring increased market volatility), we could see smaller incremental increases over a prolonged period of time to allow businesses and individuals greater time to react.