When will the BoE take action on interest rates?

interest rates board

Full credit for this article goes to the Financial Times Adviser Online – Thursday 21st September 2017. 

Read the original article here.

Who would want to be a member of the Monetary Policy Committee (MPC) right now? Your primary role is to meet with your fellow members about eight times a year and together make a grounded decision on what the official interest rate should be in the UK. Your other responsibility is to keep inflation as close as possible to the target.

 

If inflation exceeds the current target by more than a percentage point, the Bank of England (BoE) governor Mark Carney has to write an open letter to the Chancellor of the Exchequer underlining the reason for it missing the target and an action plan to battle it. But what do you do when you are unable to use the main tool in your arsenal to combat inflation due to the fear of the unknown UK current CPI, the main indicator to measure inflation, is currently at 2.9 per cent. The UK’s inflation target since 2016 has been set at 2 per cent, so I am guessing Mr Carney has sent an open letter or two to the current Chancellor of the Exchequer, Philip Hammond.

On the 3 August, the BoE surprised no-one and kept interest rates the same, but the speculation that we could see an interest rate hike in the immediate future started to diminish. Why is that? GDP is still growing even if it has been revised slightly down, unemployment is at a 43-year low and a weaker sterling against the euro and US dollar is increasing inflation, so surely now is the time to at least consider raising interest rates.Instead, the hope for seeing a shock interest rate hike by the BoE has now died down due to the unknown about what is to come with the Brexit negotiations.

The fear is that companies across the UK are holding back on investments because of concerns about what type of Brexit they will get. Though there are still two members of the MPC who voted for a rate hike, other members seem to be stuck between a proverbial rock and a hard place, where they recognise the threat of rising inflation but are far too nervous about the reaction of the UK economy if they do indeed act. Lets face it, no-one knows if we are going to get a hard or soft Brexit and the longer there is little progress with UK/EU divorce proceedings, the likelihood of a hard Brexit becomes more real.

With signs of the UK government in disagreement on how to proceed and with the EU playing hard ball, the BOE will simply feel unable to act. In fact, I expect no interest rate moves for the rest of the year. Mr Carney has recently been more dovish on the UK economic growth forecast and even if more MPC members became hawks, he does have the final say on the matter so the earliest I can see any rate hike is in the first quarter of 2018. If we have a clearer picture of where the UK will be post-Brexit, then we will see more than one rate hike next year and I can see more aggressive rate hikes than just a mere increase of 0.25 per cent. Though there are signs UK economic growth will not increase as much as expected, the UK economy is still growing and showing resilience.

The UK job market is healthy and when it is known what sort of future the UK faces outside the EU, there will be the need to encourage international investors who, for the time being, stand at the fence, looking in. For that to occur, aggressive interest rate hikes will be needed.

James Trescothick is a senior global strategist for easyMarkets.

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