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The BoE likely to favour a pro-growth stance

            As UK unemployment is close to the threshold set by the Bank of England (BoE), the inflation outlook is expected to be crucial in the timing of an eventual start of the tightening cycle. Indeed, even though the recent upward growth revisions make the UK a credible contender for this year's title of fastest-growing economy in the G7, the growth breakdown is likely more important. Thus far, the majority of the recovery has come from household consumption, especially in the housing market, driving saving down. As a result, such a recovery is unsustainable if it is not associated with a recovery in manufacturing and exports. Given the remit of the BOE to also achieve strong, sustainable and balanced growth, low rates would strongly favour the rebalancing process, barring that inflation remains below its target.

Risks for higher inflation remain subdued

               Even though the housing market needs to be monitored, the risk for inflation seems biased to the downside. Indeed, even though the persistent poor productivity could lead to higher inflation should nominal wages increase (as "more money is chasing fewer goods"), it also acts as a strong drag for wage increases. Moreover, despite a decline in inflation,real wage growth remains negative thus far. Meanwhile, further fiscal consolidation should continue to represent headwinds for consumption, as the UK will continue to reduce its structural deficit. Given these risks to consumption, the BoE is unlikely to hike rates until a more balanced recovery is underway. In that respect, the recent developments show encouraging signs of a broadening recovery. However, as mentioned by the BoE minutes, there remains "some way to go" to ensure that the recovery is both balanced and sustainable. As a result, with inflation expectations favouring lower inflation than its 2.5% target in 18-24 months time, I see no hurry for the BoE to start raising rates.