Anticipation of faster pace of BoE rate hikes in 2018

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The Bank of England held its monetary policy meeting this week. As widely expected, the central bank in the UK left interest rates unchanged at 0.50% with a unanimous vote. The central bank’s asset purchases were also unchanged at the pace of 375 billion Pound sterling.

At the meeting, the central bank said that it expects interest rates in the UK to rise at a quicker pace than it previously estimated. It said that this was in response to the stronger growth in the global economy. “It will likely be necessary to raise interest rates somewhat earlier and to a somewhat great extent than we had thought,” Gov. Mark Carney said in a news conference.

The central bank’s hawkish message comes amid an uptick in global activity which is eventually expected to fuel consumer prices higher. Central banks across the globe have already responded by further tightening monetary policy or by winding down its asset purchase program.

The Bank of England forecasts that interest rates could raise by three quarter point rate hikes that investors have been expected. It said that this expectation could be insufficient to bring the nation’s inflation rate back to the 2% target. In December, consumer prices in the UK rose to 3.0%, edging slightly lower from 3.1% in November 2017.

The British pound, which had appreciated in the previous weeks on a weaker U.S. dollar found support off the fundamentals as the currency briefly rose to an intraday high of 1.40 against the U.S. dollar. The yields on the 10-year gilts also surged, rising by five basis points to 1.6% after the BoE’s announcement.

Carney’s statement was seen by the markets as the central bank acknowledging the fact that interest rates are more likely to rise than fall. The expectations now mount for the May meeting where the BoE rate hikes in 2018 will be discussed while releasing its quarterly economic forecasts.

Earlier, expectations were anchored for an interest rate hike only after the meeting in August. But, with the BoE’s latest hawkish statement, the risks of an earlier than expected BoE rate hikes in 2018 has increased.

The BoE joins other central banks including the Federal Reserve, the BoC and the ECB in tightening monetary policy and the crisis response QE programs.

Despite the hawkish note from the Bank of England, larger uncertainties still remain. Central bank officials at the ECB and the BoE are also preparing for a hard Brexit where the UK could potentially part ways with the EU with no trade deal in hand.

The British PM has been busy lobbying with leaders of other nations. Recently, she visited China and has been in talks with Japan as well.

Last week, the ECB president Mario Draghi said that the central bank was in touch with its counterparts at the BoE to prepare contingency plans on these lines. The Brexit issue remains a major uncertainty heighted by the fact that political support for British PM May has been falling from within her own party ranks.

The Bank of England forecast that the economy is expected to grow at an annual rate of 1.8% this year. This was an upgraded forecast from 1.5% expectation that given in November. For 2019, GDP is expected to rise 1.9%, up from 1.8% as previously noted. The central bank cautioned that despite the uptick in global growth, the UK wasn’t fully participating or taking advantage of the growth cycle.

Among the major economies, the UK has been lagging behind in growth.

Looking ahead, the UK’s inflation data for the month of January will be released today. Economists forecast that consumer prices in the UK eased further to 2.9% on an annual basis in January. This marks a second consecutive month that inflation would have eased in the UK since the November rate hike.




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