Capital Economics: UK rates likely to rise in Q2 2018 and move up faster than expected

BoEThe Bank of England will start raising interest rates in the second quarter of 2018 and interest rates will rise faster than the markets expect, Capital Economics chief economist says.

Jonathan Loynes adds that faster-than-expected rate rises would be driven by the strengthening economy rather than concerns over inflation. In February inflation leapt up to 2.3 per cent from 1.8 per cent in January, the highest rate since September 2013.

“Our central forecast is now for bank rates to start to rise in the second quarter of next year and then climb to about 1.25 per cent by the end of 2019,” Loynes says.

“This would be an earlier and rather faster rise than the markets and most forecasters are anticipating. But we would stress that such a path for interest rates would primarily reflect a fairly healthy economy rather than serious inflation worries and would still leave rates at historically exceptionally low levels for a long time yet.”

Having not been hiked for almost a decade, Loynes says there are “good reasons” why UK interest rates won’t rise imminently, such as the Brexit-related uncertainty and low expectations for inflation.

However, he argues that “there is a strong case for removing some of the emergency stimulus”, while higher rates could help prevent “a major credit bubble”.

“Ultimately, of course, everything will hang on how the news on the economy evolves,” Loynes says. “If growth weakens markedly, then the MPC will rightly err on the side of caution and interest rates could stay where they are for several more years. But if we are right in expecting the economy to remain pretty robust, then the justification for maintaining the current policy stance will gradually weaken.”