Investment Clock insights

No policy changes (as expected); still signalling future rate rises


Melanie Baker

2 May 2019

The Bank of England again signalled that we should expect a rate rise, not rate cut, in the next year or so. Mixed and Brexit-affected data - as well as continued Brexit uncertainty - give them a good excuse to keep rates unchanged for now. If they turn out to be right on the economy, the clear signal from the Monetary Policy Committee (MPC) today was still that the policy interest rate will need to rise above 0.75%.

As expected, the Bank of England left interest rates unchanged today and the vote was unanimous. Looking at the broader signals on future policy, they continue to look consistent with a rate hike in the next 12 months-ish (Brexit permitting):

- The guidance language in the minutes was unchanged, “The Committee continued to judge that, were the economy to develop broadly in line with its Inflation Report projections, an ongoing tightening of monetary policy over the forecast period, at a gradual pace and to a limited extent, would be appropriate to return inflation sustainably to the 2% target at a conventional horizon”

Their growth forecasts were revised up throughout their forecasts (rather than just near-term): Their 2021 Gross Domestic Product (GDP) growth forecast was revised up to 2.1% from 1.9% too, for example (with upside revisions “partly reflecting the boost to demand from the lower yield curve and higher risky asset prices”)

They sounded more positive on the global picture: “global growth had shown signs of stabilisation and had been a little better than expected”

Their inflation forecasts further out are above target and rising:  Three years out, their inflation forecast is 2.2% compared to the 2.0% target. Their inflation forecast: “is still rising at the end of the three-year forecast period. Inflation is a little higher than the February projection at that horizon” and bear in mind that they are aiming to “sustainably” hit the inflation target

- I.E. they’ll need to hike: With inflation moving above the target and rising at the end of their forecast profile, given their forecasts already build in market rate expectations of one hike,  the MPC are signalling that they would anticipate hiking rates more than once over the next couple of years (in their central case)

‘Market curve unequal to the task’: In answer to a question, Governor Carney explicitly said that if something broadly like their forecast comes to pass, it will require more, and more frequent, interest rate increases than the market currently expects

A rate rise still looks more likely than a cut…given how little the Bank of England have tightened rates this cycle; when weighed against  the pace of growth (versus potential) in the economy in their central case; given the low unemployment rate and higher pay growth… and alongside the lack of a low inflation ‘problem’.  
…But some good excuses to stay in a holding pattern for now: Data out of the UK has been mixed and Brexit affected; measures of underlying domestic inflationary pressure don’t paint a consistent picture. Alongside Brexit uncertainty, this gives them a good excuse to stay on hold for now. As does their view that, at the moment, there is excess supply in the economy.
Brexit dependent rate hike: There is a good chance of a rate rise later this year in my view, but as with everything else in the UK outlook, that call remains Brexit dependent. Once (if?) more of the Brexit “fog” lifts, assuming that there are more signs of a rise in domestically-driven inflation and that global growth really does pick up, a near-term rate rise should look likely.
A rate rise still looks more likely than a cut…given how little the Bank of England have tightened rates this cycle; when weighed against  the pace of growth (versus potential) in the economy in their central case; given the low unemployment rate and higher pay growth… and alongside the lack of a low inflation ‘problem’.  

But some good excuses to stay in a holding pattern for now: Data out of the UK has been mixed and Brexit affected; measures of underlying domestic inflationary pressure don’t paint a consistent picture. Alongside Brexit uncertainty, this gives them a good excuse to stay on hold for now. As does their view that, at the moment, there is excess supply in the economy.

Brexit dependent rate hike: There is a good chance of a rate rise later this year in my view, but as with everything else in the UK outlook, that call remains Brexit dependent. Once (if?) more of the Brexit “fog” lifts, assuming that there are more signs of a rise in domestically-driven inflation and that global growth really does pick up, a near-term rate rise should look likely.

Past performance is no guide to the future. The value of investments and the income from them is not guaranteed and may go down as well as up and investors may not get back the amount originally invested. The views expressed are the author’s own and do not constitute investment advice.