Bank of England rate rise still in the air

By David Milliken and Alistair Smout

The Bank of England bolstered expectations that it will raise rates for only the second time since the financial crisis at its next meeting in August, after its chief economist unexpectedly joined the minority of policymakers calling for a hike.

The central bank also set out new guidance on when it might start to sell its £435bn (€497bn) of British government bonds, saying this could come once rates have reached around 1.5%, sooner than previous 2% guidance.

Short-dated government bond yields jumped on the news and sterling rallied by more than half a cent against the dollar on the prospect of tighter monetary policy.

“This all suggests that an August rate hike is… more likely than not,” ING economist James Smith said.

“While the bank hasn’t offered any firm signals or commitments… the overall outlook and tone suggests they’d still like to raise rates [if] the data allows.”

Last month, the Bank of England had said it wanted to see signs of stronger growth before it prepared to raise rates, in contrast to the US where the Federal Reserve has raised rates twice this year and plans to do so twice more.

The BoE’s Monetary Policy Committee voted six to three this month to keep rates at 0.5%, where they have been for most of the past decade, in contrast to economists’ expectations for a continued 7-2 split.

Chief economist Andy Haldane joined long-term dissenters Michael Saunders and Ian McCafferty in calling for rates to rise to 0.75%, due to concerns that recent pay deals and labour demand could push wages up faster than expected.

This opens the door for a rate rise in August, something expected by most economists but which market pricing of one set of rate futures before the meeting viewed as a less than 50% probability.

The committee as a whole said its previous view that first-quarter weakness was temporary and linked to unusually poor weather appeared “broadly on track”.

Household spending and sentiment bounced back strongly, and a sharp fall in factory output in April could reflect firms having built up excess stocks during the period of bad weather in the first quarter of the year, the bank said.

At the end of last year the UK was the slowest-growing economy among the G7 group of rich nations.

Reuters


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