BoE's first rate hike likely in H1 16

After a strong start to the year, the U.K. economy is advancing at a moderately less buoyant pace, with real GDP growth decelerating to 0.5% q/q in the third quarter, down from a 0.7% advance in the prior quarter. U.K. growth continued to be driven by steady service sector demand. However, this was partially offset by a sharp contraction in construction activity and weakness in manufacturing, which has been struggling in recent quarters alongside slower growth in emerging markets and relative GBP strength. Meanwhile, consumer price inflation fell back into negative territory in September, with the headline print decreasing by 0.1% y/y, down from a flat reading in August. 

Nevertheless, it's important to note that UK growth is forecast to continue to outpace most other developed economies this year, with real GDP set to advance by 2.5% before decelerating slightly to 2.2% in 2016 and 2% in 2017, says Scotiabank. The moderating growth trajectory reflects the fact that favorable conditions for the consumer will ease, while fiscal austerity intensifies. Some counterbalance should come from net exports as improving economic and financial conditions in the euro zone as well as stronger growth prospects in advanced economies are likely to support demand for U.K. exports. 

The U.K. inflation outlook, however, will remain subdued over the near term, with deflationary pressures likely to persist in the months ahead before the headline CPI print recovers to a year-end rate of ¼% y/y this year and 1.4% next year. 

"The first rate hike by the Bank of England will be delivered sometime during the first half of 2016. This is much earlier than currently implied by markets, which are pricing the first hike during Q4 of 2016. The release of the BoE's MPC minutes and inflation report on November 5th should shed additional light on the situation", argues Scotiabank.