City looks to BoE rate rise in May

The City today priced in an interest rate rise in May with potentially two more hikes to come later in the year.

The City today priced in an interest rate rise in May with potentially two more hikes to come later in the year.

But while a rate hike is clearly on the horizon, Bank of England governor Mervyn King has urged the City not to jump the gun.

Simon Hayes, economist at Barclays Capital, said he now expects policymakers to raise interest rates by 0.25% in May, August and November, taking the rate to 1.25% by the end of the year.

He added: “Although we believe a May rate increase is a reasonable central view, uncertainty about the path of the policy rate remains unusually high. The MPC is clearly split on the need to tighten policy at this point in time.”

David Kern, chief economist at the British Chambers of Commerce (BCC), also said a May rate-hike was now likely.

But he warned: “While this is not surprising it would increase the pressures on businesses and individuals and heighten the risk of derailing the recovery.

“High inflation is clearly a major concern and the MPC must protect its credibility. However the recovery is still very fragile and the economy must still absorb the impact of the Government’s deficit-cutting programme.”

Howard Archer, chief UK and European economist, said interest rate rises were clearly on the cards but possibly not until June.

He said the cautious tone of Mr King’s remarks indicated the governor was not convinced rates need to rise yet.

He said: “The interest rate outlook remains very uncertain and whether or not the Bank of England acts by May will depend on how well the economy performs over the coming weeks as the fiscal tightening really kicks in.”

Chris Williamson, chief economist at financial information service Markit, said if industrial surveys show strength in the next two months, an interest rise in May would be justifiable.

But he added: “Given the tone of the press conference, together with the drop in fourth quarter GDP and today’s surprisingly weak labour market report, the data appear to be far too mixed to warrant tighter policy.”

But elsewhere, Jonathan Loynes, chief European economist at Capital Economics, said the markets were currently “significantly overstating” the likely level of rates over the next couple of years.

He said the Bank’s forecasts would seem to indicate that a policy tightening is now required.

But added: “However, Mr King was keen to emphasise that the forecasts should not be interpreted too literally given the extreme uncertainty surrounding the outlook for both inflation and growth.”

Similarly, Philip Shaw, chief economist at brokers Investec, said many commentators were wrong to reach the conclusion that the Governor was signalling a spring hike in today’s forecast.

“King explicitly maintained that the MPC was not endorsing any specific path of rates, insisting that the committee never pre-announces rate decisions and remarking that it might be many quarters until the MPC moved,” he said.

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