The combination of weak domestic wage pressure and falling food and energy prices has caused a further postponement of rate tightening in the UK. The first hike now priced for Q3 16.
According to Barclays, the MPC is likely to be comfortable with the current pricing of policy expectations, and says the MPC's estimated medium-term equilibrium unemployment rate of about 5%.
Furthermore, the surprise result of May's General Election sees the Conservative government now free to follow a more aggressive programme of fiscal consolidation. The Committee will likely wait to see the government's new fiscal plan to factor in expectations of consolidation and its effect on the domestic economy.
"We would expect 10y rates to rise as the time to first rate hike diminishes and term premium is rebuilt in the 5-10y part of the curve. But gilts will also not be immune to developments in wider markets. If there is a sharper repricing of policy expectations for other central banks, this in turn would influence market expectations for the MPC, despite the June Minutes saying that policy actions would be domestically driven. Overall, a gradual rebuilding of term premium on the curve and a re-steepening of the money market curve is expected", says Barclays.
