Survey: Fed to lead Bank of England into slow and gradual rate hikes
The over-riding consensus amongst portfolio managers, analysts and finance specialists surveyed is that the US Federal Reserve will start hiking its policy rate before the Bank of England (BoE).
Respondents are less confident about the exact timing of the start of the Fed and in particular BoE hikes. The consensus forecast is for the Fed to pull the trigger in September but for the BoE to wait till Q1 2016. There is an overwhelming view that the rate hiking cycles will be slow and gradual, particularly in the UK, with the Fed and BoE expected to hike rates by only 96bps and 67bps, respectively, between now and end-2016.
The survey consisted of five sets of questions and was open from 27th May (12:00) to 30th May (12:00). Respondents could chose to skip one or more questions. 61 respondents filled in the survey, four sets responses were disregarded due to inconsistent answers. 40% of the 57 respondents are portfolio managers, 20% analysts/strategists with the remainder being finance and industry specialists. Please see Appendix for complete survey data. Thank you to all who responded to this survey.
Over-riding consensus that Fed will pull trigger first
Question 1: Which central bank do you expect to hike its policy rate first?
89% of the 57 respondents forecast that the Federal Reserve (Fed) will hike its policy rate before the Bank of England (BoE). Only 11% think the BoE will start its hiking cycle first (see Figure 2). I would argue that this reflects as much the perception of the Fed being the world’s most influential central bank and trend-setter for other central banks as the relative strength of the US and UK economies. The Fed last hiked rates in June 2006, the BoE over a year later in July 2007 (see Figure 3).
Consensus forecast is for September Fed hike with three more hikes by end-2016
Question 2: When do you think the US Federal Reserve will start hiking its Federal Funds Rate (currently at 0.25%)?
Nearly half of the respondents with a view (25 out of 55) expect the Fed to start hiking at its 17th September policy meeting (see Figure 4). This is broadly in line with a 19th May Reuters survey of analysts. Fewer than 4% expect the Fed to hike as early as its 17th June meeting. 78% of respondents expect the Fed to have hiked by end-year and all respondents expect the Fed to have hiked by Q2 2016 (see Figure 5). Note that for the sake of simplicity I set the current Fed funds rate at 25bp, the upper the Fed’s actual target range of 0-25bp.
Question 3: Where do you forecast the Fed policy rate (currently 0.25%) at end-Sept, end-Dec, end-March 2016, end-June 2016, end-Sept 2016 and end-Dec 2016?
On average respondents expect a gradual and slow Fed hiking cycle, forecasting one 25bp hike by end-year, a 25bp hike in Q1 2016 and two further hikes by end-2016 (see Figures 6 & 7). Respondents therefore expect only four rate hikes over the next 13 policy meetings. This would be in contrast to the last two Fed hiking cycles which saw pronounced and sustained monetary tightening. In the 12 months to June 2000 the Fed hiked five times by a total of 150bp and between May 2004 and June 2006 the Fed hiked rates 17 times by a total of 425bp.
The expectation of a tepid Fed hiking cycle is perhaps unsurprising, mirroring recently mixed US data (including weak Q1 GDP) and residual concerns that the US economic recovery is not based on the strongest of foundations.
Uncertainty about timing of BoE hike but tightening cycle expected to be very benign
Question 4: When do you think the Bank of England will start hiking its Federal Funds Rate (currently at 0.50%)?
While respondents are clear cut that the BoE will hike rates after the Fed, they are more divided as to specifically when it will hike its policy rate with an almost normal distribution around Q1 2016 (see Figure 8). Only 36% expect a BoE hike this year but over half forecast a hike in the first half of 2016 (see Figure 9). 11% think the first rate hike is still at least a year away. Arguably suppressed inflationary pressures from real wage growth and commodity prices, as reflected in negative inflation in April, are driving the view that the BoE is under no great pressure to start tightening policy.
Question 5: Where do you forecast the BoE policy rate (currently 0.50%) at end-Sept, end-Dec, end-March 2016, end-June 2016, end-Sept 2016 and end-Dec 2016?
On average respondents expect a very gradual and slow BoE hiking cycle, forecasting only one 25bp hike by end-March 2016 and a further hike by end-September 2016 (See Figures 10 & 11). Respondents on average therefore expect only two rate hikes over the next 16 policy meetings. This would be in contrast to the last two BoE hiking cycles which saw pronounced and sustained monetary tightening. In both the 10 months to August 2004 and in the 12 months to July 2007 the BoE hiked five times by a total of 125bp. Only 27% of respondents expect the policy rate to be at or above 1.50% by end-2016 (see Appendix).
So respondents expect the Fed to hike before the BoE and keep this one rate hike gap over the BoE between now and end-2016 (see Figures 12 & 13).
Olivier Desbarres currently works as an independent commentator on G10 and Emerging Markets. He has over 15 years’ experience with two of the world’s largest investment banks as an emerging markets economist, rates and currency strategist.