With beginning of holiday season, and approaching of New Year traders are speculating on possible BoE's rate hike in 2016. So far the outlook for UK economic growth remains solid although the latest data showed GDP growth was slower in both the second and third quarters of this year. The inflation outlook, however, remains subdued and uncertain. The minutes from the December meeting of the Bank of England's (BoE) Monetary Policy Committee (MPC) showed that policymakers saw downside risks to inflation from protracted low oil prices, and weaker unit labor costs growth so far this year.
Even though crude prices remain low, its downward pressure on the CPI's annual change will be smoother early in 2016 than it was back in 2015, when prices fell much deeper from the preceding year – the so-called base effect. So we may see some gentle pick up in CPI early next year, all things being equal, and crude prices remain steady overall. Still, the BoE sees CPI below 1% until the second half of next year.
If inflation moves up close to the level the BoE expects towards the middle of 2016, which is around 1%, we could see the first rate hike as early as May or August next year, which would also coincide with the BoE's quarterly Inflation Reports. Even though markets price in the first increase in the UK rate for as late as early 2017, the majority of economist argue the BoE could begin the tightening cycle during the second quarter of next year, if inflation continues to pick up and no major shocks occur.
With no major data releases on Monday we can expect extension of holiday season and tighter-range trading.
