The first rate hike in the UK is approaching

(24.02.2011) Minutes from the UK MPC indicate that the first rate hike is approaching. In Norway, new LFS-figures showed that the unemployment rate fell to 3.4 per cent in December.

By Anders Grøn Kjelsrud, analyst at DNB Markets

illustration gbpPound Sterling strengthened sharply after the release of the Bank of England’s minutes yesterday morning, but lost most of the gains during the trading session. The minutes indicated an increasingly divided monetary policy committee.

Andrew Sentence, which for several times has voted for hiking the key interest rate by 0.25 basis points, this time argued for a increase of 0.50 percentage points immediately. As last time, Martin Weale wanted a 0.25 basis points increase, but now he had gained support also from Spencer Dale. The remaining six members all voted for unchanged interest rate, but still highlighted that “the case for an increase had nevertheless grown in strength”.

On the other end of the spectre, however, Adam Posen still wants to expand the QE-program. Thus, the nine members of the board now have four different views of the optimal policy direction.

In any case, it seems more and more likely that the first rate hike is approaching. Last week’s inflation report showed that the central bank has become considerable more uncertain regarding when and how quickly the high inflation will ease. The annual price growth is expected to remain somewhere between four and five per cent in the short term, and then decline through 2012. Forthcoming economic data releases will determine how soon the rate hike comes. We have pencilled in a 25 basis points increase at the meeting in May and another hike before August.

Elsewhere, the turmoil in the Middle East still seems to shake the different financial markets.

Stocks slipped for the second straight session – the S&P500 and the Dow Jones index closed down with 0.6 and 0.8 per cent, respectively. The Japanese Nikkei index is down by 1.2 per cent so far. Furthermore, oil prices spiked even further. Obviously, it is impossible to project how far the oil rally could continue, should the Middle East turmoil escalate. The big fear is that the sharp price increases will break the entire global recovery.

As many times before, when investors are feeling discomfort, the Swiss Franc did well yesterday and gained versus most other currencies. Another currency, which also often is referred to as a “safe-haven” currency, namely the US dollar, came under pressure. Versus EUR, USD slipped by roughly 0.6 per cent yesterday, but has recovered somewhat this morning.

Statistics Norway’s latest Labour Force Survey showed a drop in the unemployment rate from 3.6 per cent to 3.4 per cent in December (average November-January). Both we and consensus (Reuters) expected unchanged unemployment. The number of employed rose by 4000 persons, after an increase of 6000 the previous month. However, the labour force contracted with 2000 persons, leading to a decrease in the number of unemployed of 8000 persons. Overall, the upward trend in employment seems to continue, while the decrease in the labour force also contributed to the large drop in the unemployment rate this time.

Norges Bank projected in their latest Monetary Policy Report from October an LFS-unemployment rate of 3.5 per cent on average in 2011. With yesterday’s figure we begin the year on somewhat lower level than the central bank had expected. Yet, these numbers could be volatile, and we expect that the labour force will continue to expand going forwards, contributing to a roughly stable unemployment rate.

The Norwegian krone gained somewhat versus the euro immediate after the report, but lost most of the gain shortly after. Still, EURNOK is currently traded in an area as low as 7.4. The recent strengthening of the krone has come as the oil prices have surged. Back in 2002, NOK also gained substantially due to oil price increases, and EURNOK reached as low as 7.20. Some might wonder if the same thing is about to happen again. We are not so sure, however, and see the potential for a further NOK appreciation as rather limited. In 12 months EURNOK is expected to trade around 7.70. Admittedly, should further turmoil lead to an even higher oil price, there is a risk for a stronger NOK short term.