BoE Could Hit Headwinds After First Hike in 10 Years
A November rate hike has been on the cards since the BoE’s meeting in mid-September, but the more pertinent question is what happens next. Is this a “one-and-done” event or the beginning of a traditional hiking cycle?
Fixed Income Portfolio Manager
It has been more than 10 years – more than 3,750 days, in fact – since the Bank of England last raised interest rates. This drought has added to increased anticipation that the monetary policy committee will announce a hike at its 2 November meeting.
To be sure, both wages and growth in the UK are continuing to disappoint, but inflation is running well above the BoE’s target – putting the bank under pressure to act. Yet although the markets are 85 per cent sure there will be a hike, we are not quite as convinced: we see around a 60 per cent chance.
Many market-watchers think we could see two or three hikes next year, with one fully priced in by September 2018. Yet several headwinds could block the bank’s path:
Growth has been relatively weak this year and appears set to slow down even further in 2018.
Inflation is likely to peak in October and then begin to gradually head lower.
The markets are pricing in a “soft” Brexit and a lengthy transition period, yet this is looking increasingly less likely. We would therefore expect an extremely negative market reaction to a “no deal” scenario – and if that were to happen, the BoE would be more likely to ease than tighten.
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