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First rate rise expected in H1 2015 as UK economy enjoys purple patch

Wednesday 23rd July 2014

By Abi Oladimeji, head of investment strategy, Thomas Miller Investment
Sound fundamentals
Recent data show that the UK economy continues to enjoy a purple patch. Data ranging from consumer spending to retail sales, and from business investment to industrial production have all grown at brisk rates in recent months. Crucially, while the labour market continues to strengthen, inflation continues to drift lower.
It is this combination of decent growth and low inflationary pressure that has enabled the Bank of England to maintain a loose monetary policy stance despite the increasing clamour for rate hikes by various commentators. We continue to believe that the most likely timing of the BOE’s first hike is the first half of 2015.
Housing market
Assertions that the MPC needs to raise interest rates now in order to prevent a house price bubble miss a number of important points. Clearly, the housing market is a key driver of the UK economy. However, in the absence of signs of overheating in the broader economy, interest rate hikes would be misguided. 
Raising the interest rate is a rather blunt tool and officials have at their disposal, tools that can be more precisely targeted at the housing market. These include tighter controls on a number of important housing sector-specific variables such as loan-to-value ratios, mortgage lending and underwriting standards. Moreover, the recent back-to-back declines in mortgage approvals may signal an impending cooling in the property market.
Monetary policy divergence
More broadly, from a global investment standpoint, monetary policy divergence will remain a dominant theme for markets for some time. This is because, unlike the Bank of England and the US Federal Reserve Bank which are widely expected to begin raising interest rates next year, the economic backdrop in the Euro-zone should mean that the ECB maintains a loose monetary policy stance for the foreseeable future. Likewise, the Bank of Japan is expected to maintain an accommodative policy stance for some time. This divergence will have significant implications for financial markets in the months ahead.

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