The Bank of England (BOE) has signaled the need for interest rate rises earlier and potentially more frequent than previously predicted, preparing markets for impending higher borrowing costs.
In its first meeting of 2018, the Bank’s Monetary Policy Committee (MPC) judged that, were the economy to move broadly in line with its February report projections, “monetary policy would need to be tightened somewhat earlier and by a somewhat greater extent over the forecast period,” than anticipated during its last report in November. This would be required to “return inflation sustainably to the target,” the report said.
This comes on the back of significantly improved global growth, a modest improvement to the U.K.’s growth outlook and increasing domestic cost pressures as wages look to rise.
The current market-implied path for the Bank rate is 1.2 percent, with just under three rate rises by 2021. This signals a more hawkish outlook than at the Bank’s November meeting, during which BOE Governor Mark Carney projected just two rate hikes in that timeframe.
The likelihood of the first of these hikes taking place in May sits at 50-50, according to the Bank.
Meanwhile, wage growth has picked up: “Overall, regular pay growth is projected to rise in coming quarters, at a slightly faster pace than expected at the time of the November report,” the report said.
It added that “slightly stronger-than-expected” bonus payments are boosting total annual pay growth, which is expected to reach around 3 percent in the first quarter of 2018. Most indicators of pay growth have hit or exceeded their highest levels during the last quarter of 2017 since the Brexit vote.
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The Bank of England’s (BOE) Monetary Policy Committee (MPC) held its first meeting of the year against the backdrop of an improving economy and relatively high inflation.
The U.K. economy expanded by 0.5 percent in the fourth quarter of 2017, slightly above the Bank’s forecast of 0.4 percent.
Incoming data for the country’s economy has been mixed since the MPC’s last meeting in December 2017, when the committee voted unanimously 9-0 to leave interest rates unchanged while expressing its intention of “further modest increases in Bank Rate … over the next few years.”
The BOE hiked rates in November of 2017 for first time in over a decade, voting to increase the benchmark rate from 0.25 percent to 0.5 percent as part of what it called a “gradual and limited” cycle to counter inflation.
The same month saw U.K. inflation hit a five-year high of 3.1 percent, but the government believes it is now gradually subsiding from its peak and should continue to move downward through 2018, though it is still far from the Bank’s target rate of 2 percent.
While seeing the best signs of recovery since the June 2016 Brexit vote, the country’s growth still lags behind that of its main trading partners amid a broadly-based global upswing. Fears remain that domestic politics and uncertainty over Brexit outcomes could still impede a rejoining of this faster global growth.
