Bank of England flags up future rises in interest rates

Interest rates will stay at 1.5 per cent says Bank of England but hint at further rises later in the year; this follows the first rate rise in November last year after increased economic growth in the UK.

David Sapsted

8 February 2018

The Bank of England held interest rates at 0.5 per cent but signalled future rises were in the offing because the economy was growing faster than expected.

UK interest rates

Members of the bank’s Monetary Policy Committee (MPC) voted unanimously to keep rates at their current level but raised their forecast for GDP growth this year from 1.5 per cent to 1.7 per cent.With many analysts expecting a rise in the spring, the MPC said, “The committee judges that, were the economy to evolve broadly in line with the February Inflation Report projections, monetary policy would need to be tightened somewhat earlier and by a somewhat greater extent over the forecast period than anticipated at the time of the November Report, in order to return inflation sustainably to the target.“The global economy is growing at its fastest pace in seven years. The expansion is becoming increasingly broad-based and investment driven. Notwithstanding recent volatility in financial markets, global financial conditions remain supportive.“UK net trade is benefiting from robust global demand and the past depreciation of sterling. Along with high rates of profitability, the low cost of capital and limited spare capacity, strong global activity is supporting business investment, although it remains restrained by Brexit-related uncertainties.”

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Maintaining control of inflation

Mark Carney, governor of the Bank of England, said that the bank would respond “appropriately” to bring inflation – currently running at three per cent – down to the government target of two per cent.Pressed by reporters over the timing of future rate hikes, Mr Carney said increases would be gradual, adding, “We are not going to tie our hands to a specific path for rates going forward.“This is a crucial year for the Brexit negotiations and we will all be better informed by this time next year about the future trading relationship with the EU and that will have an effect on businesses and households and the outlook for the economy, inflation and therefore the policy of the MPC.”

Predicted interest rate rises

Andrew Sentance, senior economic adviser at PwC, predicted there would be at least one interest rate rise this year and, possibly, two or three.“Inflation remains significantly above target and will only fall back gradually as we move through this year, as the Bank of England recognises in its latest forecasts,” he said.“Global inflationary pressures are building – with rising energy and food prices. And with the unemployment rate at its lowest level for over forty years, we could see some gradual rise in wage inflation.”Alexandra Russell-Oliver, currency markets analyst at Caxton, added, “The pound has rallied sharply towards 1.40 against the dollar and 1.14 against the euro after the BoE raised its economic growth and inflation projections and said it may need to increase rates earlier and to a ‘greater extent’ than thought in November.“Speculation has been building recently that the BoE could move as soon as May, and today’s hawkish language shift will likely increase that speculation. A rate hike earlier in the year could help the pound maintain higher levels, but Brexit negotiations and political uncertainty remain a significant risk.”

UK economy continues to improve

Ben Brettell, senior economist at Hargreaves Lansdown, said there were “key takeaways” in MPC report. “Firstly, the expected – a unanimous vote to leave interest rates on hold for now. The bank raised borrowing costs for the first time in a decade in November, and as such was fully expected to wait until later this year before considering a further upward move.“However, the Bank upgraded its forecast for the UK economy slightly today, citing stronger global conditions. It now looks like the next rise could happen as soon as May – the next time the bank’s economic forecasts are due to be updated.” Jacob Deppe, head of trading at online trading platform, Infinox comments, “The Bank of England has struck a significantly more hawkish tone compared with three months ago, which appears to be largely related to global inflationary concerns.“Where inflation was imported from abroad as a result of the weak Pound in the immediate aftermath of the Brexit vote, now inflationary pressure is building from all sides thanks to global economic growth.“In November the expectation was that the interest rate hike was a ‘one and done’ affair. Now it seems we could face two rate hikes this year: one in May and another in the Autumn.“Not everyone is convinced two rate hikes is the way to go, expect some market participants to play the other side of this trade.”

Read more about the future of UK business in the Winter issue of our magazine

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