Bank of England Set to Hike Rates – August 2018

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The Bank of England will be meeting this week for its monetary policy decision. According to the economists polled, the central bank is widely expected to hike rates by 25 basis points this Thursday.

The overnight index swaps markets are assigning an 80% probability of a rate hike this week.

The rate hike comes as many policymakers at the Bank of England argue for a rate hike. The premise comes amid the main narrative being that the UK’s economy has been improving. After rising at a pace of 0.2% in the first three months of the year, the economy is seen faring better into the second quarter.

The Bank of England (BoE) last hiked interest rates in November 2017. The central bank was slated to hike interest rates in May. However, the weakness in the economy in the first quarter left many policymakers from following through with a rate hike.

Still, there were some dissenting votes who argued in favor of a rate hike.

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Recent economic data has been somewhat supportive of a rate hike. The Pound Sterling initially weakened after inflation for June showed a 2.4% increase.

While this was below forecasts, inflation was seen rising at the same pace of 2.4% in the month ending May 2018. However, consumer prices still remain well anchored above the BoE’s 2% inflation target rate.

Consumer prices were initially forecast to rise 2.6%. The subdued pace of growth in consumer prices came despite higher energy prices which pushed headline inflation rates higher across most of the G7 economies.

Employment data was also partly positive as the unemployment rate in the UK stands at the lowest level since 1975. Wage growth, while stable has however remained wobbly. The average weekly earnings were seen rising 2.5% on an annual basis in the three months ending May.

This was weaker compared to the 2.6% increase that was registered in the previous three months ending April.

The case for removing the stimulus and tightening monetary policy has been gaining momentum.

The markets will also be looking to the future interest rates. For the moment, there is a wide consensus that the Bank of England won’t be hiking interest rates anymore. By 2019, the UK interest rates are expected to reach only 1.0% and to 1.2% by 2020.

This comes amid the Brexit backdrop. With mounting uncertainty and risk of a possible no-deal Brexit, the UK economy could derail the Bank of England’s rate hike plans.

There are other various indicators suggesting the risks. In a recent report, the International Monetary Fund (IMF) suggested that the UK’s economy would shrink by four percent in the longer term in the event of a no deal Brexit.

While officials at the Bank of England remain optimistic and continue to argue the case for a rate hike, the broader uncertainty could certainly dampen expectations.

In the second quarter, the UK’s economy is expected to rise an average of 0.4% on the quarter. In June, the economic indicators, measured by the PMI’s hit a six-year low. With growth prospects staying dim, alongside the uncertainty from Brexit, investors are likely to stay cautious.

For this week, however, the BoE is all set to hike interest rates which will mark the second rate hike since November 2017. The UK’s interest rate currently stands at 0.50% and will rise to 0.75% this week.

Following this rate hike, investors are closely watching the BoE as many believe that the central bank would remain in a “wait and watch” mode for the remainder of the year.

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