BoE To Signal Summer Rate Hike?

Super Thursday: BoE to raise its forecast

The UK economy is doing fine. According to the first estimates, the economy grew by 1.5%y/y in the last quarter (beating estimates of 1.4%), which indicates that the UK also benefited from the acceleration of the global economy, together with a little help from a weaker pound sterling. The labour market remained strong with the ILO unemployment rate stabilising at 4.3%. Finally, inflation remains on a solid footing with the core measure stabilising at 2.5%y/y in December.

Against such a backdrop, the Bank of England will have no choice but to revise to the upside its forecast for both economic growth and inflation. Investors have already started to adjust their tightening expectation. The market is not expecting an increase of borrowing rates as soon as May (51% chance of a rate hike according to probabilities extracted from overnight index swap).

However, according to the option market, investors are a bit nervous ahead of the BoE decision. Implied volatilities – for most maturities – have increased, while the 25-delta risk reversal measure moved further in negative territory. All this suggests that investors are also considering that the BoE could stay on the back foot by remaining extremely cautious in its communication.

GBP/USD is currently trading at around 1.3850, down 0.20% on the day. The first resistance area lies at around 1.4290 (high from last Friday), while a stronger one can be found at 1.4345 (high from January 25th). On the downside, a support stands at around 1.3655 (previous high from September 20th and lows from mid-January).

Indian economy confirms its recovery

Providing strong growth numbers following 2017 Annual GDP growth of 7.10%, 2017 December CPI and WPI Y/Y of 5.21% and 3.58% respectively, we see further potential for recovery in India. Following major growth impediments essentially caused by: declining exports (between November and December 2018: -18.20%), cancellation of 86% of money in circulation (impact affecting 2017 economic year), the July 2017-released Goods and Services Tax roll-out misunderstanding and the oil price hike in the middle of 2017. In order to counter these drawbacks on Indian growth, the Indian Government took the decision to make use of fiscal stimulus, reducing corporate taxes by 25% for companies with turnover of up to INR 2.50 billion (USD 39 million), applicable for more than 99% of Indian companies that issue surplus, which in turn will be stimulating job creation (unemployment rate stagnates at 8.80%, in line with 2002 numbers).

In this economic context, the Reserve Bank of India confirmed yesterday its willingness to maintain its Repo rate at 6%, unchanged since February 8th 2017, limiting further debt increase (Indian debt in % of GDP published at 50.10%) and trying to contain inflation in its 2%-6% band range.

Since recent RBI communications, Indian 10 years Government Bonds yields declined by -0.52% while the S&P BSE Sensex rose by 1.58%, pushing investor expectations higher for 2018. USD/INR is trading at 64.25 (-5.82% since January 2017), signaling positive economic signals for the Indian economy.