Investment Clock insights

UK rate rise – hawkish vote but BoE stick with ‘gradual and limited’


Melanie Baker 

2 August 2018

The Monetary Policy Committee (MPC) raised rates 25bp today, as expected. The vote, however, was unanimous rather than split. Again with their inflation forecast, and now with their new neutral rate, they signal we should all expect more rate rises to come. This was still a rate rise interspersed with notes of caution, and a sizeable gap still looks likely before the next rate rise. But, Brexit permitting, days like today seem likely to become the norm every few quarters.
Hawkish signals included: 
The Bank of England’s (BoE’s) new estimate of an equilibrium trend (nominal) interest rate at 2-3%: As expected, the MPC also published an estimate of the UK’s trend equilibrium interest rate.  At 2-3% (nominal), they would expect the (shorter-term) equilibrium rate to rise gradually towards the long-run estimate “if uncertainty dissipates and as the fiscal consolidation imparts less of a drag on growth than on average in recent years”.  
The vote was unanimous, with no votes to keep rates on hold.
Again, we got a reference to returning inflation sustainably to the target over a conventional horizon. In his opening statement, Governor Carney was explicit that on their forecasts (which incorporate the market implied interest rate path, i.e. only three rate rises in three years) inflation was above the target at the conventional two-year horizon.
The cautious:  
The ‘gradual and limited’ messaging remains firmly in place and they use their equilibrium rate analysis to underscore this.
Their estimates of the neutral rate – both short-term and long-term are very uncertain. 
They continue to make lots of references to Brexit and its potential impact on the outlook.
The composition of the MPC also changes again in September, with the MPC losing one of its more hawkish voices as Ian McCafferty leaves the committee. 
And underneath it all, there wasn’t much change in their economic forecasts:  In May, the inflation and unemployment rate forecast at the end of the BoE’s forecast horizon (three years ahead) were 2.0% (i.e. at target) and 4.0% (i.e. a touch below the BoE’s estimate of equilibrium).  Now, they are 2.0% and 3.9% respectively.  That builds in a slightly weaker GBP and a slightly weaker profile for interest rises (the market implied path). Meanwhile, their GDP forecasts changed little. In other words, not much has changed in the way the MPC view the economy.  They are more confident now that weak data in Q1 was a weather-related blip, but their medium-term forecasts are little changed.  

The Monetary Policy Committee (MPC) raised rates 25bp today, as expected. The vote, however, was unanimous rather than split. Again with their inflation forecast, and now with their new neutral rate, they signal we should all expect more rate rises to come. This was still a rate rise interspersed with notes of caution, and a sizeable gap still looks likely before the next rate rise. But, Brexit permitting, days like today seem likely to become the norm every few quarters.

Hawkish signals included

The Bank of England’s (BoE’s) new estimate of an equilibrium trend (nominal) interest rate at 2-3%: As expected, the MPC also published an estimate of the UK’s trend equilibrium interest rate.  At 2-3% (nominal), they would expect the (shorter-term) equilibrium rate to rise gradually towards the long-run estimate “if uncertainty dissipates and as the fiscal consolidation imparts less of a drag on growth than on average in recent years”.  

The vote was unanimous, with no votes to keep rates on hold.

Again, we got a reference to returning inflation sustainably to the target over a conventional horizon. In his opening statement, Governor Carney was explicit that on their forecasts (which incorporate the market implied interest rate path, i.e. only three rate rises in three years) inflation was above the target at the conventional two-year horizon.

The cautious:  

The ‘gradual and limited’ messaging remains firmly in place and they use their equilibrium rate analysis to underscore this.

Their estimates of the neutral rate – both short-term and long-term are very uncertain

They continue to make lots of references to Brexit and its potential impact on the outlook.

The composition of the MPC also changes again in September, with the MPC losing one of its more hawkish voices as Ian McCafferty leaves the committee. 

And underneath it all, there wasn’t much change in their economic forecasts:  In May, the inflation and unemployment rate forecast at the end of the BoE’s forecast horizon (three years ahead) were 2.0% (i.e. at target) and 4.0% (i.e. a touch below the BoE’s estimate of equilibrium).  Now, they are 2.0% and 3.9% respectively.  That builds in a slightly weaker GBP and a slightly weaker profile for interest rises (the market implied path). Meanwhile, their GDP forecasts changed little. In other words, not much has changed in the way the MPC view the economy.  They are more confident now that weak data in Q1 was a weather-related blip, but their medium-term forecasts are little changed.  

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.