UK rates unlikely to rise before Q4

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Slower economic momentum in the UK favours a rather cautious monetary stance, reinforcing our expectations that rate normalisation will not begin before Q4 2015. However, consumption will receive a further boost from low energy prices, calling for a careful watch over inflation in the next months.

Yesterday’s preliminary gross domestic product (GDP) reporting for Q4 2014 unveiled slightly weaker economic growth than expected. At 0.5% over the previous quarter, down from 0.7% Q3, momentum slowed a tick more strongly than expected by market consensus (0.6%). While this is not shocking, and the following final release might exhibit revisions, it offers indications that domestic growth remains robust while external demand, in particular from the stagnating eurozone, is dragging down the overall figure. Among the output-side indicators reported today, services expanded by a healthy 0.7%, while production output, more broadly associated with exports, contracted by 0.1%. Domestic consumption hence appears healthy, and will receive a further boost thanks to lower oil/energy prices in early 2015. With general elections approaching in spring 2015, beneficial growth data could help the Conservative Party to remain in power. Going forward, we believe momentum will remain softer than in 2013/ 2014, but nevertheless on track for an average of 2.5% in 2015. As usual, more insights will be available with the second reading of GDP data, to be published on 27 February.

David Meier is an economist at Julius Baer

Jonathan Boyd
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