Could a November rate rise signal the start of a tightening cycle in the UK?

BoEThe Bank of England is likely to raise interest rates as soon as November following today’s Monetary Policy Committee meeting, when the majority of members agreed that monetary stimulus should be withdrawn over the coming months in the face of rising inflation, Capital Economics says.

MPC members voted against an interest rate rise at today’s meeting, despite a return to rising inflation revealed this week. However, the minutes forecast inflation to hit 3 per cent in October, the threshold at which Bank of England Mark Carney must write to the Chancellor to explain the overshoot from the 2 per cent target.

Paul Hollingsworth, UK economist at Capital Economics, says the MPC “gave a pretty clear signal today that it intends to raise interest rates within the next few months,” adding that he expects a 25 basis point hike in November.

“We are bringing our central forecast for the first hike in interest rates from 0.25 per cent to 0.50 per cent forward, from May 2018 to November this year.

“However, once last August’s emergency cut has been reversed, the more dovish members of the MPC are likely to want to see actual evidence of cost pressures building before embarking on a more sustained tightening cycle. But if we are right in thinking that the economy will end up surprising the MPC’s forecasts on the upside next year, then we anticipate three hikes, alongside the May, August and November inflation reports.”

Mark Nash, head of global bonds at Old Mutual Global Investors, says the MPC’s surprisingly hawkish tone shows the market got it wrong, “failing to price in any hikes meaningfully in the near term”.

“The BoE’s formal nod to interest rate increases in coming months is a clear indication that the market has got this wrong, failing to price in any hikes meaningfully in the near term. It is also likely the central bank is not happy with the large fall in sterling on a trade-weighted basis, either.

Nash adds that in the market’s defence, Mark Carney played down the potential risks of low rates to financial stability last month, which weakened sterling, but blames the market for being too preoccupied with Europe’s strength in the Brexit negotiations.

“With unemployment still over 9 per cent in the euro area, this focus may prevent investors from accurately gauging the direction of sterling’s value versus the euro, in our view.”

Anna Stupnytska, global economist at Fidelity International, says an interest rate rise in November would be to reverse the emergency rate cut last year rather than signal the start of a tightening cycle.

“The Bank of England surprised investors today with a hawkish tilt to the statement, clearly trying to lay ground for an interest rate hike potentially at the next inflation report meeting in November,” Stupnytska says. “I believe this is an attempt to take advantage of the currently benign growth environment to reverse the emergency interest rate cut in August last year, following the Brexit referendum.

“However, given downside risks to global and UK growth as well as to inflation as the impact of sterling depreciation fades over the next few months, I think this hawkish shift will not last. It is highly unlikely that this reversal to the emergency hike, even if it takes place later this year, is going to signify a start to the tightening cycle. Just like other major central banks, but with an added complexity of Brexit negotiations, the BoE will have to continue to tread carefully.”