UK rate hike ‘on a knife edge’

The Bank of England is still expected to raise interest rates in early 2016 but that prediction now rests on a knife’s edge after the US Federal Reserve delayed its first hike, a Reuters poll of economists found.

Median expectations in the survey of over 60 analysts show the bank increasing the bank rate to 0.75% in the first quarter of 2016 from the current record low of 0.50%.

But that consensus is far from solid.

Twenty-nine economists pencilled in a raise while 25 expected no change, making it the closest call since the timing of the first hike moved to early 2016 from end-2015 seven months ago.

One economist still expects a hike this year. The bank and the Fed are the only two major central banks expected to tighten policy soon and there has been a lot of debate over the timing of their initial moves.

With the US Federal Open Market Committee taking a pass on hiking rates for the first time in nearly a decade earlier this month, uncertainty over the bank’s policy path has heightened.

Economists were similarly divided before the Fed’s September meeting with only a small majority correctly predicting no change in rates.

“My conviction has never been all that strong. Because of the Federal Open Market Committee’s delay in raising the (Fed) funds rate target, it seems likely the UK rate rise will occur later than I previously expected,” said Stephen Lewis at ADM Investor Services. ADM, along with a few other banks, pushed its calls for the first hike out to the second quarter of 2016.

When asked, 22 of 42 economists said their conviction about the timing of the first hike had decreased over the last month. Seventeen said it had stayed the same and three said it had increased.

The survey’s median forecasts envisaged a second British hike in the third quarter, putting rates at 1% by the end of 2016, lower than the 1.25% predicted just two weeks ago. From there on, rate hikes are expected to be more gradual than previously predicted. The bank rate is predicted to end 2017 at 1.75% and 2018 at 2.25%.

“The Fed’s relatively dovish statement in September and the apparent soft patch in recent UK economic data on retail sales, industrial production and the last services PMI all increase uncertainty,” said John Hawksworth, chief economist at PwC.

Inflation has not helped the case for a hike. Despite a surge in wage growth, consumer inflation has been subdued at best since the start of the year and was flat in August. n Reuters


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