BofA Merrill pushes back call for first BoE rate hike

Bank of America Merrill Lynch has shifted back its Bank of England rate hike call from May to November 2016.

The bank attributed the change in part to softer recent wage data, but also to uncertainties surrounding the UK’s ‘Brexit’ referendum, a seeming shift in BoE strategy and further declines in the oil price.

Merrill left its call for three hikes in 2017 unchanged.

It said wages have been the BoE’s lodestar but pay gains have slowed recently and the bank is likely to want to see a convincing turnaround before hiking rates.

“That now seems unlikely to happen quickly enough for a May hike,” it said.

In addition, other reasons to wait and see have strengthened.

Growth in the first three quarters of last year was recently revised down while oil price falls have cut the near-term inflation outlook.

“At the least, subdued inflation gives the BoE plenty of room to wait,” said Merrill.

It noted that the BoE’s strategy seems to be changing compared with the first half of last year, when it appeared to be considering hiking early so it could go very gradually.

“Recent BoE statements suggest to us an increasing preference for waiting longer, until they get closer to seeing the ‘whites of the eyes of inflation’.”

Merrill reckoned data wobbles would prove temporary.

“If the jobless rate keeps falling as fast as in 2015 it could push towards 4.5% by end-2016. We find it hard to imagine the BoE not hiking rates then.”

Merrill said the BoE has many policy tools in its locker now and may be more inclined to use the macro-prudential ones if interest rates are held lower for longer.

"We assume that would take a little pressure off rate hikes. So we stick with our call for three rate hikes in 2017.”

Brexit is the key unknown as far as Merrill is concerned.

“It could have an important bearing on when (and if) the BoE hikes rates this year. But it is unclear both when that plebiscite will be held and how economic growth might respond running up to the vote.”

The BoE may want to hold off on any interest rate changes ahead of the vote in case the drag from any uncertainty ends up being material and/or persistent, it said.