Market expectations project only one rate hike in 2018, but if inflation remains above the bank’s 2 percent target and households continue borrowing more rather than saving, the BOE could be forced to tighten its monetary policy at a faster pace, Pickering said in a note released Monday.
“A series of gradual rate hikes seems appropriate given the outlook for stable real GDP growth, above-target inflation and full employment,” he said, forecasting two hikes of 25 basis points in 2018 and another in 2019.
This is because higher interest rates tend to reduce the money available in people’s pockets as mortgages and credit become more expensive. In turn, this would control the increase in credit seen in the U.K., where data released Monday showed annual consumer credit at 9.9 percent in September, with a jump in borrowing on credit cards, overdrafts and unsecured loans.
However, some analysts believe that the BOE will not pursue an aggressive monetary policy because the economic conditions, such as substantial wage growth, are simply not there. As a result, Carney’s communication is unlikely to signal more than another hike next year, if that.
“I’d be surprised if markets react too much on Thursday,” Mike Bell, global market strategist at JPMorgan Asset Management, told CNBC Tuesday. He added that he does not believe that an aggressive hiking will take place, given that wages would have to increase significantly for that to happen.
“If they don’t hike, sterling would fall,” he added.
