United Kingdom in the spotlight

hello again,

Two days ago we show inflation data from several European economies including the UK. CPI inflation in the UK in October was 2.2%, against expectations of 2.5%. If the downward trend is maintained, the Bank of England will be in a very comfortable situation. Data from the British economy recently significantly pierced expectations and further declining inflationary pressures.

Publications from the UK in recent times positively surprised after the period in which it was seen chilling moods, the British economy is behaving in this respect similar to the U.S.. Industrial PMI, which we show last week was 56 points. and is still at the highest level of 2.5 years. Even earlier, the reading service PMI pointed to 62.5 points. that is, the most in the past 16 years.

This is very positive news for the British economy because the services in this country are responsible for 3/4 of the gross domestic product. If we look at the employment sub-index was 56.2, and he also was the best of 16 years. This entry in the fourth quarter suggests that the readings from the UK again can start positively surprise. Moreover, this set of data means that the improvement in the labor market at the end of the year should be strong and cautious assumptions BoE to decline in the unemployment rate are becoming less relevant. The BoE forecast a three quarter unemployment rate of 7.9% + / - 0.1 points. percent. However, in the last three months of unemployment was 7.7%. MPC forecast that the unemployment rate falls below 7% until mid-2016. (against a decline in unemployment below 7% BoE will not lower interest rates).

Current projections of the Bank of England to this day even before the publication of the new.

The inflation projection:

chart 1. CPI inflation projection

Unemployment rate:

chart 2. Unemployment projection

chart 3. Cumulative probability of unemployment

BoE report:

◦ Unemployment may fall below 7% in 3Q 2015.!
◦ The risk of weak GDP growth increases, the risk of persistent high unemployment falls
◦ Inflation in 1q 2015 has come down below 2%
◦ 4q GDP growth in 2013 is projected at 0.9%
◦ unemployment has fallen in recent months, stronger than expected


Carney (BOE):

◦ Increase fastest in 6 years
◦ growth based on consumption and the real estate market, investment and exports remain weak
◦ Inflation can bounce slightly in the coming months, but in the long term will remain permanently low
◦ bank forecasts are conservative
◦ The 7% unemployment rate will not lead to an automatic increase in interest (something like FED)


New projections BoE from 2013-11-13

The inflation projection:

chart 4. new CPI inflation projection

Unemployment rate:

chart 5. actualized unemployment projection

chart 6. new cumulative probability of unemployment

BoE projections have been revised in line with expectations. The unemployment rate is expected to fall below the earlier 7%. In the August report, MPC assumed decline in the unemployment rate below the target in 2016, the new projection unemployment is likely to reach the target level in the 3k 2015. This implies that the central bank of England may raise interest rates sooner than previously had founded, and this implies the growth of quotations of the British pound.

Were also reduced expectations for CPI inflation to be in the quarters lower than previously assumed. Mark Carney sees the greatest threat to the growth of UK GDP.

The Bank of England inflation report said in part that he was too pessimistic relative to the economy, especially the labor market. Pointing to a fairly significant probability of reducing the unemployment rate to 7% next year, given the market's suggestion that theoretically, it is possible to increase interest rates in 2014.

The market has already priced it anyway - the market is currently discounting almost three interest rate increase by the end of 2015, what's interesting is, in principle, has not changed. Projection, along with better data prevented only reduce speculation about increases to a lot of lower inflation (as of yesterday, inflation is 2.2%, the market expected 2.5%).

Does this mean that the Bank of England agrees with the expectations of the market? Not necessarily. President Carney insisted yesterday that the achievement of the unemployment rate of 7% does not necessarily mean increases. Therefore, a further increase in FRA rates, at least to a significant degree, it does not seem justified at this moment.

regards,
oscarjp