Over the past few weeks, markets appear to have pushed back their expectation for the timing of the first hike in UK interest rates all the way to Q3 2019, and there has been some speculation of a rate cut in the near term. This stands in contrast with the latest economic indicators, such as January’s Markit/CIPS PMI which suggested that the recovery regained some momentum at the start of the year. And although February’s MPC Minutes and Inflation Report were fairly dovish on the whole, the MPC’s forecasts still showed inflation overshooting the 2% target at the 2-year forecast horizon. In fact, the further downward shift in market expectations over the past week has left them broadly in line with the “constant 0.5% Bank Rate” forecast, which showed inflation hitting 2.5% by the end of the (3-year) forecast period. We admit that a near-term rate hike looks very unlikely, but we still think that the first hike will come in November this year, much sooner than markets expect.
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