Wells Fargo: Here is Why The UK May Not Hike Rates Until Well Into 2015

Hello folks, The consensus among economists is that the UK will commence tightening its monetary policy in Q1 2015. Wells Fargo believes there's reason to think it could come a bit later.

"The Bank of England has pledged to keep its Bank Rate at 0.50 percent, where it has been maintained since March 2009, until spare capacity in the British economy has been more fully absorbed," they write. "Unfortunately, spare capacity is an unobservable variable, and it can vary over time due to fluctuations in actual GDP growth and changes in potential GDP growth, which is also unobservable.

Wage growth is an observable variable that should be inversely correlated with spare capacity in the labor market (i.e., as spare capacity in the labor market falls, wage growth should rise), and we think that it will be very important to watch wage growth in coming months—the MPC has essentially told us to do so—to determine the timing of the first rate hike by the Bank of England since 2007.

The consensus forecast among economists (as measured by Bloomberg) looks for the MPC to commence its tightening cycle in Q1-2015, and the yield curve implies that investors believe the first rate hike will happen by then as well.

Our forecast looks for the first rate hike to occur in the
second quarter of next year. In any event, the MPC likely will not raise rates this year, unless wages accelerate significantly over the next few months."

Source: business insider wells fargo