Bank of England signals faster-than-expected rate rise

04 August, 2017, 00:40 | Author: Irene Delgado
  • Sterling at 11-month highs vs dollar as BoE meeting gets underway

Bets on interest rate futures suggested investors had pushed back their expectation for the first BoE rate hike by four months to December next year, RBC Capital Markets said.

Sir John said: "I think there is a very strong case for reversing the quarter percentage point cut from a year ago".

Fabrice Montagne, chief United Kingdom and senior European economist at Barclays, said: "We expect the Bank of England to downgrade its forecast in order to reflect disappointing data".

The sharpest rising component to inflation has been imported food prices, literally right at the start of the food chain.

In corporate news, clothing retailer Next surged as full price sales were up in the second quarter and the company confirmed a third special dividend of 45p and said £307m of surplus cash is expected this year, up from guidance of £255m in May.

Brexit is already taking some kind of toll on the economy.

If policymakers continue to adopt a neutral to dovish outlook the Australian Dollar is likely to soften, with the odds of any imminent interest rate hike fading still further.

Rates have now been held at 0.25% since last August, when they were reduced by 25bps amid market volatility after the Brexit vote.

So, with the PMI data out ahead of the MPC decision, any upward moves may be on hold and the markets will have little time to digest the BoE's Inflation Report upon release.

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"Of course, it could perhaps be that traders are only concerned with the near-term expectations of the BoE given its history of bad forecasts and the sheer amount of uncertainty in the economic outlook due to Brexit". However, others, such as the International Trade Secretary Liam Fox, have cast doubt on such an outcome. On the other hand, they downgraded some of their forecasts, especially for wage growth in 2018. But 2018 earnings growth cut to 3% from 3.5% and 2019's to 3.25% from 3.75%.

Laith Khalaf, Senior Analyst at Hargreaves Lansdown, added: "The Office for Budget Responsibility thinks interest rates will rise to just 1% by 2022, still below the rate of inflation, assuming the Bank of England meets its 2% CPI target".

The benchmark rate had been stable at 0.5% from March 2009 to August 2016, when the Monetary Policy Committee made a decision to reduce it by 25 basis points, in the wake of dire survey data following the Brexit vote. Hawkish member Forbes, who voted for a hike at the previous meeting, has left the committee while McCafferty and Saunders again voted for an immediate increase in rates to 0.50%.

Combined with the corresponding strong manufacturing PMI and disappointing construction PMI this painted a relatively resilient picture of the United Kingdom economy, giving investors some cause for confidence.

While in its last set of minutes the Bank said that its forecasts were "conditioned on the assumption that the adjustment to the UK's new relationship with the European Union is smooth", this time it said that the "projections assume that, in the interim, households and companies base their decisions on the expectation of a smooth adjustment". It also slashed its 2018 forecast to 2.75 per cent, down from 3.25 per cent in May.

Households looked through Brexit-related uncertainties initially.

Over 2016 business investment fell for the first time in a calendar year since the financial crisis a decade ago.

Some tightening will be needed in the next three years.



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