22/06/2018 - UK Rate Hike Expected In August

GBP

The Bank of England bolstered expectations that it will raise rates for only the second time since the financial crisis at its next meeting in August, after its chief economist unexpectedly joined the minority of policymakers calling for a hike. Sterling rallied this afternoon after Andy Haldane added his vote to pressure to raise interest rates. The pound recovered most of its losses for the week against the US dollar yesterday afternoon.

The central bank also set out new guidance on when it might start to sell its 435 billion pounds of British government bonds, saying this could come once rates have reached around 1.5 percent, sooner than previous 2 percent guidance.

The BoE’s Monetary Policy Committee (MPC) voted 6-3 this month to keep rates at 0.5 percent, where they have been for most of the past decade, in contrast to most economists’ expectations in for a continued 7-2 split.

Household spending and sentiment bounced back strongly, and a sharp fall in factory output in April could reflect firms having built up excess stocks during the period of bad weather in the first quarter of the year, the BoE said.

Chief economist Andy Haldane joined long-term dissenters Michael Saunders and Ian McCafferty in calling for rates to rise to 0.75 percent, largely due to concerns that recent pay deals and labour demand could push wages up faster than expected. This increases the probability of a rate rise in August, and is the consensus amongst most economists.

USD

The number of Americans filing for unemployment benefits unexpectedly fell last week, pointing to a further tightening in labor market conditions. Initial claims for state unemployment benefits decreased 3,000 to a seasonally adjusted 218,000 for the week ended June 16. Claims data for the prior week were revised to show 3,000 more applications received than previously reported - declining for four straight weeks. The labor market is viewed as being near or at full employment, with the jobless rate at an 18-year low of 3.8 percent. The unemployment rate has dropped by three-tenths of a percentage point this year and is near the Federal Reserve's forecast of 3.6 percent by the end of this year.

Key Announcements

09:00 – EUR: Markit Services PMI (Preliminary) expected to be lower at 53.7 from 53.8
14:45 – USD: Markit Services PMI (Preliminary) expected to be lower at 56.4 from 56.8