BOE tightening cycle likely to start in November

Markets clearly perceive the cyclical positions of the US and UK to be similar and a gentle increase in US short rate expectations has been accompanied by rising expectations that the MPC cold start to unwind stimulus in the UK. GBP was the only G10 currency to hold its own against a generally stronger USD in July. 

"However, the risk that the first hike in the cycle comes before year-end is still underpriced by rates markets. Markets currently attach around a 15% probability to a rate hike by end-2015 and a 25bp move is only fully discounted by May of next year", says RBC capital markets. 

Although the 8-1 vote to keep rates unchanged at the August MPC meeting (7-2 was expected) may be seen as a short-term setback for bullish-GBP sentiment, it is not considered as game-changing and the other news in the minutes, Inflation Report and press conference is all consistent with rates rising earlier than the market discounts.

The Bank maintained a slightly above-target two- to threeyear inflation forecast, despite GBP's recent strength and "some members" see the risk to the upside. It is still likely that more will switch to voting for higher rates in the coming months. 

"The tightening cycle might start in November. It is a close call whether the necessary majority of five will have formed at that point, but if it has not, then February 2016 seems far more likely than May and the upside risk remains significant", added RBC capital markets.