Rate hike in 2016 still likely despite slide in oil prices

The unexpected slide in oil prices last week, to a six-year low of about $40pb, has left most forecasters once again pulling down their CPI inflation projections and has led some to speculate that this could delay the first rate hike.

The fall in oil prices may well put the MPC once again on red alert for any sign that low inflation is feeding through to inflation expectations or pay growth. But by Spring, the MPC should be fairly confident that inflation is on its way back up to target. So we doubt that the Committee will wait until 2017 to raise rates, as markets currently expect. To us, Q2 of next year still seems the most likely date for the first rate hike.