Market prices in 50% chance of UK rate rise in 2017

The market is pricing in a 50 per cent chance of a UK rate rise this year ahead of the Bank of England’s monetary policy committee next week.

This week GDP figures showed growth of 0.6 per cent in Q4, while inflation for December hit 1.6 per cent.

Bank of England governor Mark Carney says the monetary policy committee is prepared to tolerate a temporary overshoot in inflation, but that there were limits to this.

An 8 per cent rise in oil prices since the last inflation report has been slightly offset by a small increase in sterling.

HSBC is skeptical that there will be a rate rise this year.

Economist Elizabeth Martins says: “We are not persuaded that the MPC is yet in hawkish mode. Mark Carney did say on 16 January that there are limits to the extent to which the Bank will tolerate above-target inflation. But the committee said this in November too.”

However, Martins says HSBC is predicting the Bank of England will raise its growth forecasts for the UK from 1.4 per cent to 1.7 per cent – a long way from the 0.8 per cent it projected immediately after Brexit.

However, she does not see the bank making significant changes to its growth forecasts for 2018-2019.

IHS Global Insight chief economist for the UK and Europe Howard Archer says the Bank is certain to leave rates unchanged at 0.25 per cent at next week’s meeting.

Archer agrees it is likely that the Bank will raise near term GDP and inflation forecasts, but says he will be more interested to see if they alter projections for the the longer-term outlook.