BoE's First Interest Rate Hike in a Decade?

31 October, 2017

BoE's First Interest Rate Hike in a Decade?

With Carney’s speech scheduled for tomorrow at 12.30 GMT, markets are rubbing their chins wondering if this will be the first interest rate hike for the UK in close to a decade – although not long-ago markets expected an interest rate hike as unlikely to happen in the next two years.

Now with the recent surprise growth of the UK economy, some analysts are seeing a rate hike as more of a possibility. Just a few days ago, it was announced that the British economy had grown 0.4% surpassing expectations set at 0.3%.

While this is all true – the real decision will be made by the members of the BoE and they don’t seem convinced the timing is optimal for a hike. Just this month Deputy BoE Governor Ramsden mentioned that domestically signs pointing towards increased inflation are still stifled. Silvana Tenryro (external member of the BoE’s monetary policy committee) warned that raising rates too early could cause adverse economic conditions. At the moment the 0.25% that was set last August was to protect the bank against the potentially hazardous effects of Brexit.

 These BoE officials represent the opposite camp regarding interest rate hikes – their scope is much wider, seeing the rate of growth increased but is still trailing far behind 2016’s numbers. According to analysts though these voices are not the majority – with some experts postulating a 90% chance of a hike during the meeting. The biggest problem proponents of the hike are referencing is the increasing inflation – which is at 3% at the moment and the last time the central bank held interest rates low (in 2012) it shot up to 5%. They are also pointing to tentative proof of growth including a 4.3% drop in unemployment in the 3 months preceding August marking it at its lowest since the seventies.

Although Brexit was promised (at least the period before or the process leading up to Brexit) as economic apocalypse – but CPI, GDP and other indices have frequently surpassed forecasts. Most recently as I mentioned in the introduction, the UK’s economic growth surpassed its outlook reaching 0.4%.

Another perplexing variable added to this already increasingly complex equation is credibility – if the bank for-goes yet another rate hike, even though the majority of its officials have hinted towards one – it could make the BoE the bank that cried wolf…or should maybe more appropriately the Bank that cried Bear.

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Sources:

https://www.theguardian.com/business/2017/oct/28/uk-interest-rate-decision-two-sides-vital-move

https://www.theguardian.com/business/2017/oct/29/bank-england-push-interest-rate-uk-up-05-economy

https://www.theguardian.com/money/2017/oct/28/interest-rate-rise-affect-homeowners-savers-bank-of-england

https://www.theguardian.com/business/2017/oct/24/can-interest-rate-rise-halt-uk-inflation-experts-debate-data-brexit-watch


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