The latest comments from BoE’s Miles are further proof that the MPC has shifted from a neutral to a tightening stance. This shift was initiated by Carney last week, who like Miles, was seen as a very dovish member of the MPC. While the doves are now morphing into hawks there remains uncertainty over when the BoE will choose to hike interest rates.
The campaign to prepare economic agents (firms/households) has already begun and the BoE will be hoping that there will be sufficient hedging to prevent hiccups once the tightening cycle begins. The minutes of the April and May meetings have shown concern from the BoE over the low level of implied volatility which might be a reflection that there has not been enough preparation for higher rates.
The minutes on Wednesday are likely to show that the debate is more balanced than the Carney/Miles comments would suggest as the theme is about laying the foundations for an eventual rate hike. The BoE is not yet ready to shift the tightening stance up a gear and start outlining specific dates just yet having only just succeeded in shifting rate expectations from April/May 2015 to a hike by the end of 2014.
The FPC, which meets today, is still expected to announce limits on mortgage lending/borrowing on June 26, but the BoE now wants us to view this as complementing the wider need for policy tightening. For the BoE, the first rate hike and its timing is less important than making sure that households/firms are prepared for and understand that tightening will happen in a limited and gradual manner – helped by a still subdued outlook for inflation and wage growth, as today’s inflation data reflects.
We still expect the BoE to hike in Nov 2014 and then to subsequently hike by 25bp at every inflation report month during 2015. This will take official rates to 1.75% by the of 2015.