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2 Feb 2015
BoE can ‘look through’ first-round effects of oil prices on inflation – GS
FXStreet (Barcelona) -Kevin Daly of Goldman Sachs, expects BoE to continue to view the impact of falling oil prices to be neutral on inflation, and further forecasts UK to see a rate cut in Q4 2015, much before consensus expectations.
Key Quotes
“Financial markets have responded to the collapse in oil prices by focusing on the implications for consumer price dynamics, while appearing to largely ignore the implications for output growth.”
“Inflation expectations have fallen, fixed income markets have rallied but the growth expectations implicit in equity market valuations appear largely unchanged.”
“Given that the implications of lower oil prices for inflation dynamics can already be seen, while the implications for growth remain a forecast, perhaps this response is not surprising. But it does raise the possibility that markets (and forecasters) will be surprised by the strength of growth as the year progresses.”
“For the monetary policy outlook, we view the fall in oil prices as being broadly neutral, at least to a first approximation: much as the Bank of England ‘looked through’ the first-round effects of oil on inflation when prices were high, we expect it will do so again now that prices are low.”
“The fixed income market has drawn a very different conclusion: UK yields have fallen in tandem with oil prices and the front end of the curve does not now price in a first rate hike until the second half of 2016, significantly later than our forecast (2015Q4).”
“While there are risks to our forecast, if our relatively optimistic views on growth and wage inflation prove to be correct, we are comfortable with the view that the BoE will begin to tighten earlier than the market is currently discounting.”
Key Quotes
“Financial markets have responded to the collapse in oil prices by focusing on the implications for consumer price dynamics, while appearing to largely ignore the implications for output growth.”
“Inflation expectations have fallen, fixed income markets have rallied but the growth expectations implicit in equity market valuations appear largely unchanged.”
“Given that the implications of lower oil prices for inflation dynamics can already be seen, while the implications for growth remain a forecast, perhaps this response is not surprising. But it does raise the possibility that markets (and forecasters) will be surprised by the strength of growth as the year progresses.”
“For the monetary policy outlook, we view the fall in oil prices as being broadly neutral, at least to a first approximation: much as the Bank of England ‘looked through’ the first-round effects of oil on inflation when prices were high, we expect it will do so again now that prices are low.”
“The fixed income market has drawn a very different conclusion: UK yields have fallen in tandem with oil prices and the front end of the curve does not now price in a first rate hike until the second half of 2016, significantly later than our forecast (2015Q4).”
“While there are risks to our forecast, if our relatively optimistic views on growth and wage inflation prove to be correct, we are comfortable with the view that the BoE will begin to tighten earlier than the market is currently discounting.”