Closer to a rate hike in UK

(17.02.2011) The inflation report from Bank of England showed that the signal rate may be hiked during the spring this year. Today Norwegian GDP and the annual speech by the central bank governor will attract attention.

By Knut A. Magnussen, Senior Economist at DNB Markets

illustration dealingroom in DNB markets osloThe inflation report from Bank of England showed that the central bank has become much more uncertain regarding when and how fast the high inflation will fall towards the target. In the short term inflation is expected to stay between 4% and 5%, while it will probably decelerate during the course of next year. The expected decline will, however, depend on several factors, such as global inflation, inflationary expectations and the degree to which enterprises will hike prices in order to restore their profit margins. The central bank seems to put somewhat less emphasize on the still high unemployment rate and the low wage increase that was reported yesterday.

Based on market forward rates inflation will most likely fall towards the target. Hence, this indicates that the bank rate will be hiked in order to get inflation down.
The market is expectation two hikes this year, the first during the spring, and then a gradual further increase to 3% in the beginning of 2014. The governor declined that a decision to hike had been taken, but we think the most likely outcome now is a hike during the spring. The GBP strengthened somewhat after the report, but fell back later in the day.

There are two major Norwegian events today. This morning Statistics Norway will release GDP for Q4 and a report with macroeconomic forecasts. We expect that Mainland-GDP will grow by 1.1% - whereas the consensus estimate is 0.8%. Norges Bank also expects 0.8% growth, according to their October report. We forecast that private consumption will grow by 1% and hence give the largest contribution to GDP growth this quarter.

The other event is the annual speech by the central bank governor. This will be the first speech by Øystein Olsen. However, we think that he will follow his predecessor Mr Gjedrem in addressing some major long-term issues in the testimony and not focus on short term monetary issues. If we are correct the speech will be interesting but will hardly affect markets. 

The minutes from the FOMC meeting in January showed that the committee had become more optimistic on the economy in the light of stronger macro data. The GDP forecast for 2011 was raised to 3.4%-3.9% and the downside risks to the outlook for GDP and inflation had been reduced. However, core inflation is expected to stay low and unemployment to be reduced only slowly. Hence the QE2 program will most likely continue as planned, even though a few members argued that the program may be reduced if the recovery picks up speed.

housing starts rose by 14.6% in January, much more than expected. However, permits fell by more than 10%. Hence, there is not reason to believe that housing starts will continue to pick up strongly. Industrial production fell somewhat in January, but this was due to cold weather. Manufacturing production rose somewhat lifted by higher car production.

Today CPI is due. It is expected that core inflation will rise somewhat, but still be lower than 1%. The higher than expected outcome for producer prices yesterday (0.5% m/m in January) may imply that there is upside risk to the inflation data. The USD fell vs the EUR yesterday, caused by the weak data and continued tensions in the Middle-East. EURUSD was traded a bit over 1.36 at the intra day peak. 

Swedish inflation and unemployment is due today. We expect that inflation will rise from 2.3% in December to 2.6% in January. This is a bit higher than the consensus forecast. The unemployment rate unadjusted) will most like climb in January due to seasonal factors.

The swiss central bank president, Mr Hildebrand, yesterday spurred interest in the CHF by saying that the very low interest rate should not continue for a long time. He saw the inflation pressure rising but this was mainly caused by food and energy prices.