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THE Bank of England will decide whether to hike interest rates to their highest level for more than nine years next week as economists predict a “close call” decision.

In what would mark another milestone for the economy in its recovery since the financial crisis, members of nine-strong Monetary Policy Committee (MPC) are expected to increase rates from 0.5 per cent to 0.75 per cent on Thursday.

The move would see rates hit their highest level since March 2009, when they were slashed from 1 per cent to 0.5 per cent as the financial meltdown and recession wrought havoc.

Investec economist George Brown said he is “fairly confident” the Bank will move to raise rates and is pencilling in an 8-1 vote in favour, with Sir Jon Cunliffe the only dissenter.

He believes the economy has performed in line with the Bank’s last forecasts in May, when it backed off from a widely anticipated hike and said it wanted to wait and see how the economy recovered after a weather-hit start to the year.

The bank also edged a step closer to pressing the button in June when its chief economist Andy Haldane joined two fellow policymakers in calling for a rise.

Howard Young at the EY Item Club believes the vote may be less definitive, given that inflation figures recently came in lower than expected – unchanged at 2.4 per cent in June, while wage growth has also been weak.

He said: “It has recently become a closer call, but we believe that the odds still favour the Bank of England lifting interest rate from 0.50 per cent to 0.75 per cent on Thursday after the August MPC meeting – most likely following a split vote.”

He added: “With interest rates down at 0.50 per cent, the Bank of England would clearly likely to gradually normalise monetary policy given that it is essentially an emergency low rate.

“Furthermore, inflation remains above target and the labour market looks relatively tight with the MPC considering that there is little slack left in the economy.”

The decision to raise rates would come as a blow to some borrowers on variable rate mortgages, but would offer relief to savers who have seen paltry returns on deposits since rates have languished at 0.5 per cent or below since 2009.

It is thought the bank’s latest set of forecasts in the accompanying inflation report will reinforce the case for a rise, with many economists expecting growth to have recovered to 0.4 per cent in the second quarter after slowing to 0.2 per cent in the previous three months.

The bank had already predicted in May that this would be the case and its latest set of forecasts are set to confirm its outlook for the year ahead.

But the bank is likely to increase its inflation forecasts, with a weaker pound and higher oil and energy prices pushing up the outlook and further justifying the need for a rise.

A rate rise in August would be the second hike in the past year, after the Bank voted for an increase from 0.25 per cent to 0.5 per cent in November – the first such move for more than 10 years and reversing the cut made in the aftermath of the Brexit vote.

Mr Brown believes this will be the only increase in 2018, however, predicting a quarter point rise every six months until they reach 1.5 per cent in 2020.

“We think the bank wants to raise rates in a gradual way and that would be consistent with the next one in February,” he said.

Source: Irish News

The Bank of England looks set to pass a post-financial crisis milestone next week by finally raising interest rates above their emergency levels set more than nine years ago.

But with a potentially messy Brexit nearing, Governor Mark Carney may sound cautious about the pace of further moves away from the BoE’s still-powerful stimulus programme.

In March 2009, when the financial crisis was raging, the BoE slashed its benchmark rate to 0.5 percent to stave off the risk of a depression.

Bank Rate has sat there since, apart from a 15-month period after the shock referendum vote in 2016 for Britain to leave the European Union, when it was cut again to 0.25 percent – the lowest in the three-century history of the central bank.

Now, Carney and his colleagues are expected to nudge rates up to 0.75 percent on Aug. 2, going beyond last November’s increase back up to 0.5 percent.

However, taking rates above their crisis levels will not be a vote of confidence in the world’s fifth-biggest economy.

Britain has gone from having the strongest growth of the Group of Seven rich nations to being one of the slowest after the Brexit decision.

The terms of Britain’s future relationship with the EU are still unclear, eight months before Brexit, and Prime Minister Theresa May could yet be unseated by her own Conservative Party which is split on how close the country should remain to the bloc.

At the same time, consumers are still feeling a squeeze on their spending power. And inflation, while above the BoE’s 2 percent target at 2.4 percent, has been weaker than expected.

Nonetheless, the BoE says the economy cannot grow even at its current sluggish rate without causing too much inflation, given Britain’s chronically weak productivity growth.

A BoE decision to raise borrowing costs could also be backed up by a new estimate of what it considers the neutral interest rate for Britain’s economy, which neither stimulates nor suppresses demand and which is likely to be rising in the coming years as the effects of the financial crisis fade.

U-TURN AHEAD?

BoE officials have tried to soothe concerns about raising rates, something they promise will be gradual and limited.

“Voting for a 25 basis-point rate rise, a full decade after monetary policy was first placed on an emergency setting, is hardly either surprising or radical,” Chief Economist Andy Haldane said in late June.

But some analysts believe raising borrowing costs is an unnecessary risk that the central bank is taking because it failed to deliver on previous signals that a hike was coming.

John Wraith, a strategist at UBS, said domestic inflation pressure — chiefly from wage growth — was very benign while tighter monetary conditions risked triggering a squeeze on indebted consumers and cooling domestic demand.

“If and when that happens, the interest rate market may start to anticipate a reversion by the (BoE) to a neutral policy stance, especially if there are ongoing headwinds and downside risks to the outlook emanating from the UK’s protracted exit from the EU,” he said in a note to clients, adding that investors might even start to bet on a rate cut ahead.

Yet the chance of an increase on Thursday is rated at 80 percent by financial markets, and eight of the BoE’s nine monetary policymakers are likely to back a rise, analysts say.

Investors will be listening closely for whatever signals Carney gives about the outlook for further increases.

Markets are not pricing in an increase in borrowing costs to 1 percent for at least another year.

In the past, Carney has warned investors they are being too relaxed about the prospect of further hikes.

Victoria Clarke, an economist with Investec, said the BoE might want to send another reminder to the market to remain on guard, as long as Britain manages to secure a deal with the EU and avoid a damaging “cliff-edge” Brexit.

“We don’t know what politics will bring but I think Carney would want to push those expectations up a bit,” Clarke said.

Source: UK Reuters