BoE's rate hike likely in February 2016

U.K. was back in deflation in September as CPI inflation declined to -0.1% y/y from 0.0% y/y in August. Core inflation was unchanged at 1.0% y/y in September (Danske Bank: 1.1% y/y, consensus: 1.1% y/y).

The expected pick-up in inflation early next year should reduce concerns among MPC members and thus we continue to believe the BoE will hike in Q1 16, probably in February, says Barclays. The tighter labour market and accelerating wage growth has put pressure on the BoE. 

Some British energy companies have announced energy bill price cuts, beginning late September/early October, which represent a downside risk to the CPI inflation print in October.

Focus will be on wage growth tomorrow when the U.K. labour market report is due. 

"The average weekly earnings excluding bonuses (3M average) is likely to rise to 3.0% in August from 2.9% y/y in July. Moreover, wage inflation is likely to accelerate further as the labour market continues to tighten", says Danske Bank.