Global Daily – BoE on course for May hike

by: Bill Diviney , Aline Schuiling , Arjen van Dijkhuizen

BoE View: MPC on track for further gradual rate rises – The Bank of England kept interest rates unchanged at 0.5% today, however the decision was not unanimous, with arch-hawks McCafferty and Saunders both voting for a 25bp hike. This was not entirely unexpected; both MPC members had previously dissented in favour of a hike in the three meetings leading up to last November’s hike. In the minutes, their reason for dissent was centred on their view that ‘slack was largely used up and that pay growth was picking up’. However, the overall assessment of the MPC from both the statement and the minutes was much more measured, with recent economic data judged to be ‘broadly consistent’ with the February Inflation Report forecasts. Indeed, although February CPI inflation cooled a little more than expected, wage growth as seen in yesterday’s labour market data was stronger than expected. Both sterling and gilt yields initially spiked on news of the dissent by the MPC hawks, although these moves were quickly reversed as markets digested the more measured tone of the minutes. We continue to expect the BoE to hike by 25bp in May, with a further hike in November. (Bill Diviney)

Euro macro: Euro PMI and Ifo decline but still in line with above-trend growth – The eurozone composite PMI staged its second monthly decline in a row in March. The index fell to 55.3, down from 57.1 in February, which was a sharper decline than expected. The weakness was roughly equally distributed amongst the services and the manufacturing sector. A similar picture was painted by Germany’s Ifo business climate indicator which was also published today. It declined to 114.7 in March, down from 115.4 in February. The expectations component of the Ifo indicator dropped more than the current conditions indicator, with the differences particularly large in the industrial sector. This is probably partly due to fears about trade tariffs imposed by the US against China and the downward impact this could potentially have on German exports, in case tensions were to escalate. Despite their declines in March, the eurozone PMI as well as Germany’s Ifo indicator are still consistent with GDP growing at a pace well above the trend rate this year. Indeed, both indicators had risen to historically high levels in the final months of last year and have now returned to roughly the levels of a year ago, when the eurozone economy was growing at a quarterly rate of around 0.6-0.7% qoq, which is well above the trend rate. (Aline Schuiling)

China macro – PBoC continues with targeted tightening under new Governor. Similar to events happening last December, the PBoC decided to follow the Fed’s 25 bp rate hike on Wednesday by a 5bp ‘mini rate hike’ of its 7 day reverse repo rate. It was the first rate action by the PBoC’s new Governor Yi Gang, who recently succeeded Zhou Xiaochuan after 15 years of service. While the step is small, it shows that also under a new Governor, the PBoC will continue with its targeted tightening campaign, guiding market interest rates higher. This campaign is primarily aimed at reducing excessive financial leverage in the system, including in interbank markets and shadow banking. Meanwhile, the authorities aim to keep credit to the real economy flowing. This explains why the PBoC has kept the benchmark one-year lending rate at 4.35% since October 2015 so far and continues with its policy of safeguarding bank system liquidity if needed. We anticipate Beijing’s targeted tightening to continue this year. Against that background, we expect China’s gradual slowdown to resume this year. That said, external risks are rising, with the US yesterday announcing targeted tariffs on Chinese imports following its Section 301 investigation on forced technology transfer and intellectual property rights. See our recent China Watch: More centralism, more protectionism for more analysis. (Arjen van Dijkhuizen)