bank 2179 960 720
Marketing No Comments

The Bank of England will almost certainly hike rates in May

The question of the next rise in UK interest rates has shifted definitively from if to when.

Last week an uncharacteristically hawkish press conference by the Bank of England Governor Mark Carney left the markets in little doubt that it could come as early as May.

At the start of the week the probability of a May rate hike rose was rated as 50 per cent, yet by Friday this had risen to 80 per cent.

That momentum will have been strengthened by the confirmation yesterday that UK Consumer Price Inflation stayed at 3 per cent in January, confounding economists’ forecasts that it would nudge down to 2.9 per cent.

There are several potential explanations for inflation staying so far above the Bank of England’s 2 per cent target. But the main one alluded to by Governor Carney last week was that there is very little spare capacity left in the economy.

In other words, the UK economy is close to full employment. This should be a cause for celebration; as full employment tends to also signify wage rises, business investment and rising productivity.

All of which are good in themselves, but also because such a collection of indicators should theoretically mean the economy is expanding by more than most current forecasts suggest.

Good vs bad inflation

Not only that, but dig down into the Office for National Statistics (ONS) inflation data for January and food prices are coming down. In fact, one of the main drivers of inflation in January seems to have been higher fuel prices – which are determined by the vagaries of the global oil market rather than the fundamentals of the UK economy – which still rose by less than they did this time last year.

So this could be good inflation: inflation driven by rising wages, driven by full employment and a growing economy rather than driven by a weak Pound inflating imports and input costs.

But the problem for the Bank of England is that it will have to play a waiting game before it really knows which type of inflation Britain is experiencing.

The answer is unlikely to come before April, when the UK’s first quarter GDP numbers will be published. That data is very likely to determine whether the Monetary Policy Committee (MPC) hikes interest rates the following month.

Brexit

If GDP is weak, the MPC might stay its hand, but if the UK is benefitting from the global economic boom as many think it currently is, the GDP figure should be relatively strong.

The MPC will hope the economy is strong enough to withstand a rate hike because, as mentioned before in this column, it will want rates to be high enough for it to have the option of reducing them to mitigate the potential economic shock when Britain leaves the European Union (EU) 10 months later.

But even if GDP is not that strong in the first three months of 2018, the Bank could still push ahead with a May rate rise.

Above target inflation and weak economic growth as Britain heads for the EU exit is highly undesirable.

Take back control

The MPC may have essentially made up its mind to act already. In which case, Tuesday’s inflation data will have confirmed to Mr Carney that hiking rates to bring inflation under control more quickly rather than letting it fall naturally is the right course of action.

Sadly such sophistry will provide zero solace to hard-pressed households struggling because the cost of living is still outpacing average monthly wage rises.

And while that could change as the year progresses, we are all stuck between interest rates and inflation: either way costs are going up. The only difference is that hiking interest rates gives the Bank some semblance of control.

Source: City A.M.

Marketing No Comments

UK inflation sticks at nearly six-year high in January

British inflation unexpectedly held close to its highest level in nearly six years in January, highlighting the challenge facing the Bank of England and reinforcing expectations of a rise in interest rates in May.

Consumer price inflation held at an annual rate of 3.0 percent in January, unchanged from December, after hitting its highest since March 2012 in November at 3.1 percent, the Office for National Statistics said.

Sterling rose after Tuesday’s data and was up by 0.5 percent against the dollar at 1035 GMT. British government bond prices fell in contrast to a rise in the price of German bunds.

Inflation jumped in Britain after the June 2016 decision by voters to leave the European Union, which hammered the value of the pound and pushed up the cost of imports.

By contrast, many other countries are facing below-target inflation despite strong economic growth.

The BoE surprised investors last week by saying interest rates would need to rise sooner and by somewhat more than it had previously expected, as it wanted to get inflation back to target within two years rather than three.

Markets priced in as much as a 70 percent chance of a quarter-point rise in interest rates by May, and a roughly 50 percent chance of a further increase in rates to one percent by the end of the year – a level last seen in 2009.

Economist Lucy O‘Carroll of Aberdeen Standard Investments said inflation appeared to have peaked as the impact of the pound’s fall after the Brexit vote began to fade.

Nonetheless, signs of a pick-up in wages suggested that price growth might be slower to fall than the BoE hoped.

“Even if inflation drops back a bit further from here, it looks likely to settle at a higher level than the Bank of England feels comfortable with. It will also mean slightly higher interest rates than we’ve been used to,” she said.

Tuesday’s CPI data showed downward pressure on inflation from a lesser increase in fuel prices than a year ago. But the ONS highlighted a smaller than usual seasonal decline in the cost of visiting zoos and gardens as pushing up on price growth.

Core consumer price inflation – which excludes food, energy, alcohol and tobacco – rose to 2.7 percent from 2.5 percent, and services price inflation, which is more sensitive to wage costs, also accelerated.

BoE policymakers have pointed to rising wages as a possible reason to increase rates, although headline data still shows average growth in weekly earnings well below the rate of inflation, squeezing on living standards.

The ONS figures suggested less pressure in the pipeline for food and manufactured goods.

Among manufacturers, the cost of raw materials – many of them imported – was 4.7 percent higher than in January 2016, the smallest increase since July 2016. Economists polled by Reuters had expected input prices to rise by 4.2 percent.

Manufacturers increased the prices they charged by 2.8 percent less than the consensus forecast of 3.0 percent and the smallest increase since November 2016.

Source: UK Reuters

money 2724248 960 720 1
Marketing No Comments

UK house prices fall for second month in January – Halifax

British house prices fell unexpectedly last month as inflation continued to squeeze household budgets, dragging annual house price growth down to one of its weakest rates in years, figures from major mortgage lender Halifax showed on Wednesday.

Average house prices fell 0.6 percent in January after a 0.8 percent decline in December, Halifax said, well below a consensus forecast of a 0.2 percent rise in a Reuters poll of economists and the first time prices have fallen for two months in a row since just after June 2016’s Brexit referendum.

British annual house price growth has slowed since the vote to leave the European Union, though the impact has been concentrated in London and neighbouring areas, with most other parts of the country relatively little affected.

House prices in the three months to January were 2.2 percent higher than the same time a year earlier, down from 2.7 percent in December and the weakest increase since July, when prices rose at the slowest pace since April 2013.

Howard Archer, an economist at consultants EY Item Club, predicted house prices would rise by two percent this year, as high inflation and Brexit uncertainty kept a lid on prices.

“Housing market activity is expected to remain lacklustre as the marked squeeze on consumer purchasing power only gradually eases, confidence is fragile and appreciable caution persists over engaging in major transactions,” he said.

British consumer price inflation hit its highest rate in more than five years in November, and the Bank of England raised borrowing costs for the first time in more than a decade.

November also saw Chancellor Philip Hammond scrap a tax on house purchases for almost all first-time buyers. Halifax said it was too early to see any impact from the change.

Archer said a shortage of housing made outright year-on-year price falls unlikely.

The Halifax data contrast with figures published last week by rival lender Nationwide which showed a surprise pick-up in growth to 3.2 percent in January, the biggest rise since March 2017.

Nonetheless, the figures would make the BoE’s Monetary Policy Committee reluctant to signal a rapid pace of further interest rate rises when it publishes its next rate decision on Thursday, Samuel Tombs of Pantheon Macroeconomics said.

“The MPC … can’t ignore the evidence of a housing market slowdown now in front of them, so we doubt that they will signal to markets tomorrow that interest rates could rise as soon as May,” he said.

Source: UK Reuters

wallet 1263532 960 720
Marketing No Comments

Gloom shrouds UK households as inflation expectations spike

British households turned gloomier about their finances in January as their expectations about future inflation hit a near four-year high and they relied more on borrowing, according to a survey which underscored the strain on many consumers.

Data company IHS Markit said its Household Finance Index fell to a four-month low of 43.0 from 43.7 in December.

Britain’s economy slowed in 2017 as higher inflation – caused by the post-Brexit referendum fall in the pound – hurt the spending power of consumers.

Official data on Friday showed that 2017 was the weakest year for retail sales in Britain since 2013.

While the Bank of England expects the squeeze will ease in 2018 as inflation cools and weak wage growth ticks higher, Monday’s survey showed consumers – at least for now – lack this optimism.

“Pressures on UK household finances intensified at the fastest pace in four months, as rising living costs and subdued pay growth have led to a renewed squeeze on cash available to spend,” Sam Teague, economist at IHS Markit.

The survey showed inflation expectations hit a 47-month high in January, a possible concern for the BoE.

Official data published last week showed that inflation eased off a nearly six-year high in December when it edged down to 3.0 percent in December. But the BoE does not expect it to return to its 2 percent target before 2021.

Furthermore, the IHS Markit survey showed households’ need for unsecured borrowing grew at the fastest pace in 11 months.

Official data has shown consumer lending growth cooled in the second half of last year.

“There was little evidence to suggest that households reined in day-to-day spending, as households increased their expenditure at a modest rate whilst utilising additional unsecured debt to balance budgets,” said Teague.

Forty-five percent of households expected the BoE to raise interest rates within six months, down slightly from 48 percent in December’s survey.

A Reuters poll of economists published last week showed the BoE is likely to keep rates at 0.5 percent until the fourth quarter of this year, having increased borrowing costs for the first time in over a decade in November. [ECILT/GB]

Households reported a strong rise in workplace activity but job insecurity hit a six-month high, IHS Markit said. Official data have shown two consecutive monthly declines in employment, suggesting employers are turning more cautious as Brexit nears.

The IHS Markit survey, conducted by Ipsos MORI, polled 1,500 Britons between Jan. 10 and 14.

Source: UK Reuters

property 2922160 960 720
Marketing No Comments

Why British residential property remains a good bet in 2018

British residential property has long been viewed as a very strong asset class for investment. While there have been ups and downs along the way, such as the price crash in the early 90s, it has generally offered excellent long-term returns.

The market’s reputation has taken something of a knock recently, however, which has been driven by Brexit-related uncertainty and a slight cooling in price growth. This is a temporary blip and is unlikely to dampen the market in the long-run. Rather than be deterred, I firmly believe that investors should embrace some of the excellent opportunities this market presents.

The Brexit vote in June 2016 is the starting point for this slight faltering of faith in the residential market. In the run up to the referendum vote, both house prices and foreign investment in the UK were at record highs. However, a somewhat surprise result  signified a break with the status quo and ushered in economic uncertainty, and this soon led to concerns about whether price growth could be sustained.

–UK inflation: where’s it heading in the long term?

However, these anticipated shockwaves failed to materialize. House prices have continued to rise ever since the referendum, illustrating that demand for residential property remains high and providing investors with strong capital returns. Rental yields across much of the country have also continued to perform well, with ever greater numbers of tenants looking to the private rented sector to meet their needs.

For some investors, the vote has actually opened up new opportunities. The devaluation of Sterling against currencies like the Euro, Dollar, and Renminbi has meant that UK assets offer better value than they did before the vote. This provides overseas investors with excellent value for money, and has also kept important capital flowing into the country’s property market – ensuring that developers can successfully finance the projects that increase the UK’s housing stock.  Similarly, a sustained low Bank Rate has also kept investors’ mortgage costs down.

While Brexit might not have been the doomsday event for the property that some expected, there are also concerns in several quarters that the market has run out of steam. There has been some evidence that the London market has cooled off slightly in recent months – particularly at the upper-end, which has been heavily affected by the changes to stamp duty on second homes. However, other parts of the country also offer world class property investment opportunities. Manchester, Liverpool and Leeds continue to provide strong returns, and our recent Global Real Estate Outlook found that Birmingham is set to become a global property investment hotspot. This is due to a combination of low prices, high yields, and a rapidly growing local economy. The UK residential property market therefore continues to offer investors with a variety of different portfolio sizes, risk appetites and capital availabilities a diverse range of different propositions.

–Which way will property prices go in 2018?

While the additional stamp duty levy on second properties and recent changes to landlords’ tax relief remain in place, the political environment towards property investment is less highly-charged than it was pre-Brexit. The recent Autumn Statement, for example, was notable for the absence of significant policies directed at landlords. While punitive pre-Brexit policies remain in place, policymakers’ attentions now appear to be more focused on improving first-time buyers’ prospects and increasing housebuilding than cracking down on investment portfolios.

Looking forward, there are a few risks facing the UK’s residential sector, but many of these look increasingly unlikely to come to fruition. While economic turbulence resulting from the UK and EU failing to agree upon a divorce bill could have derailed the economy, it now appears that a reasonable deal that works for both parties in in sight. This will encourage stability in the market. Furthermore, the imbalance between supply and demand in the property market will support both a baseline of rental yields and house prices. With the UK’s population continuing to grow, this trend is unlikely to be reversed anytime soon.

Although the economic outlook often changes in the short-term, the reality is that the UK will continue to be a great long-term destination for residential property investment for some time.

Source: Money Observer

bank 15617 960 720
Marketing No Comments

Will the Bank of England raise interest rates again in 2018?

The Bank of England’s Monetary Policy Committee (MPC) has decided to hold base rate at 0.5 per cent, a month after its first rise in a decade. Interest rates are the primary monetary lever that the governor of the Bank of England, Mark Carney, can pull to bring down inflation if it is deemed too high.

But while the UK currently has its highest rate of inflation in five years at 3.1 per cent, the Committee believes this is ‘likely close to its peak, and will decline towards the 2 per cent target in the medium term’.

Nick Dixon, investment director at Aegon comments: ‘This week’s inflation figures will make uncomfortable reading for Mark Carney, given previous predictions that inflation had already peaked. With pressure on for wage increases and political demand for looser fiscal policy, the governor will worry about the potential for high inflation to become embedded.’

Michael Metcalfe, global head of macro strategy at State Street Global Markets adds: ‘Even with current inflation above 3 per cent no-one expected back-to-back hikes from the Bank of England. The big question now is how quickly inflation will fall. While the bank projects a gentle fall in 2018, our online inflation measure from PriceStats1 suggests a faster drop, which may yet undermine the case for further tightening altogether.’

With the inflation issue not yet quelled there are calls for the MPC to begin acting more quickly. Currently, it would appear that uncertainty around the UK’s weak economic growth and unwillingness to disrupt strong employment figures are the main reasons for a lack of action.

–UK inflation: where’s it heading in the long term?

Angus Dent, chief executive officer of peer-to-peer lender Archover, argues: ‘This decision [to hold base rate] ends 2017 on a damp squib. The Bank of England’s approach is too slow. We need a bolder approach to monetary policy in the new year.

‘Rather than playing wait-and-see, the Bank should emulate the US Federal Reserve and use interest rates as a tool to combat the growth in inflation currently squeezing British incomes.

‘At a time of low wage growth, UK households need a funding boost. It’s clear that 2018 is going to be a rocky road for the UK economy as we navigate the final stages of Brexit. With rates staying low for the foreseeable future, UK investors and savers need to take matters into their own hands.

‘Instead of waiting for the Bank to hand them better returns, they need to take the initiative and look for high-yield investment options themselves. As Mark Carney continues to tread gingerly, individuals need to broaden their portfolios to make sure they’re making the most of their money.’

However, Mr Dixon adds that consumers may not have to wait that long for bolder action to start: ‘With pressure on for wage increases and political demand for looser fiscal policy, the governor will worry about the potential for high inflation to become embedded. In our view it’s likely that rates will rise sooner than people expect and we may not have to wait long in the new year for another rate increase.’

Source: Money Observer

Marketing No Comments

UK public’s inflation outlook rises to four-year high, BoE survey shows

LONDON (Reuters) – The British public expects the Bank of England to overshoot its inflation target by the most since 2013 in coming years and foresee the biggest chance of further interest rate rises in over a decade, a BoE survey showed on Friday.

The central bank raised interest rates last month, the first increase since 2007, and said more increases were likely as consumer price inflation held at 3 percent, its highest in five years, during September and October.

Policymakers keep a close eye on gauges of how the public think inflation will change in future. Entrenched expectations of high inflation can make it harder to return inflation to its 2 percent target.

The BoE’s latest quarterly survey of the public’s inflation perceptions showed that expectations for average inflation in two years’ time rose to 2.9 percent from 2.7 percent, its highest since November 2013.

Nonetheless, economists said the BoE’s Monetary Policy Committee would be relieved by the relatively modest rise in public expectations given the increase in current inflation.

“The MPC will likely take comfort from the fact consumer price inflation reaching a five-and-a-half-year high … has not led to a significant de-anchoring of inflation expectations,” EY Item Club’s chief UK economist Howard Archer said.

Britons see inflation in five years’ time at 3.5 percent, also the highest since November 2013. The proportion expecting another BoE rate rise within the next 12 months rose to 63 percent, the highest since 2007.

BoE Governor Mark Carney said the central bank expected to raise interest rates “very gradually” over the next couple of years, although much would depend on how smoothly Britain departed from the European Union. It expects inflation will fall to 2.2 percent by late 2019.

Earlier on Friday, Britain and the EU broke an impasse over EU citizens’ post-Brexit residence rights, outstanding financial liabilities and border arrangements between Northern Ireland and the Irish Republic.

While surveys of inflation expectations play an important role in economic theory and central banks’ economic models, some policymakers view their implications as far from clear.

Public expectations in the past have appeared to lag – rather than predict – future inflation, and many Britons still focus on the higher, but outdated, measure of retail price inflation which the BoE no longer targets.

The BoE survey was conducted by pollsters TNS and based on responses from 2,097 people in the days just after the BoE raised interest rates on Nov. 2.

Source: UK Reuters

Marketing No Comments

Rising inflation – should I fix my mortgage rate?

As interest rates rise, should you reassess your mortgage?

THE recent decision to increase the Bank of England base rate was indeed forecasted in this column some months back, and its lack of logic remains the same. Quite how mortgage borrowers are driving inflation because of spending is beyond me, or perhaps that’s not what they are aiming at!

As inflation tops 3 per cent, it appears well beyond the 2 per cent target of the BoE.

However, it is well documented, that as a net importer rather than exporter, a weakened currency, driven by a Brexit fiasco has created a sharp rise in import costs, which creates inflation through higher prices.

This has nothing to do with the borrower, who is now caught between the rock of inflation on the goods they buy, and the hard stone of higher rates.

A rise in interest rates would normally have made sterling increase in value (and have pushed down these inflationary pressures above) but the seemingly ‘marketed’ statement from the BoE that any rate increases would be gradual curbed that. Currency wars indeed.

The impact will merely be psychological as more than half of borrowers are on fixed rate mortgages. Furthermore, this puts further pressure on the economy, as the householder factors in higher rates, along with inflation, but falling incomes.

With businesses unsure about Brexit, increased costs of their imports and the potential for higher borrowing rates, they will be unlikely to want to increase wages.

When the BoE changes rates, there isn’t necessarily always a direct reaction upwards or downwards in mortgage costs from lenders, although we have seen future fixed rates creep up over the last few months.

When rates nosedived to 0.5 per cent, mortgages stayed at over 4 per cent, and very gradually have returned to just over 2 per cent on average. Since 2009, it has always been a 1.75 per cent gap yet it was never more than a 1 per cent gap in the preceding years to the crisis! So there is room to move.

Since 2011, more than half of new borrowers have used fixed rates (over 84 per cent of new loans for last year), so there will be much less impact on borrowers via rate increases and in turn, the ability to slow inflation.

However, the biggest risk comes to approximately half of the 4.2 million borrowers whose fixed rates come up for review this year or next, who may be faced with a shock jump.

Right now, as you see, logic doesn’t seem to matter, so it’s worth borrowers looking to protect their own budgeting ability.

Mortgage rates are at a historical low and many borrowers will have no idea what a 7 per cent mortgage rate looks like let alone 15 per cent. Borrowers acclimatised to low rates could easily be caught out.

The Brexit and current government fiasco will only put further downward pressure on sterling, which increases inflationary risks, which in turn increase the potential for further rate rises.

I’ve clarified the best mortgage rates available today with our mortgage department, and a new borrower with a £180,000 mortgage will pay £702.26 per month for a two year fixed rate, £753.34 for a five year fixed rate but £706.43 for a variable/tracker rate.

Those who couldn’t deal with rising rates will see that one small rate rise will have their variable rate above the two- and five-year fixed rates, so if budgeting is important, you should seek out the advice of an independent mortgage broker. Needless to say, the difference between the best rates and worst rates is also considerable.

Trying to calculate what mortgage rates may do is a scientific gamble, but gambling with your ability to pay your mortgage and your home and security, needs careful consideration.

A downside of fixed rates however, is the early repayment penalties. If you decide to move or have to sell, having a hefty early repayment penalty is a difficult pill, so be sure your broker limits this. They will have every mortgage rate at their finger tips and will be able to guide you through that minefield.

Source: Irish News

Marketing No Comments

Steady UK inflation leaves question mark over BoE rate action

LONDON (Reuters) – British inflation unexpectedly held steady in October, wrong-footing the Bank of England and raising fresh questions about how fast the central bank will follow up on this month’s interest rate hike.

The annual rate of consumer price inflation was unchanged from September’s five-and-a-half-year high of 3.0 percent, official data showed.

When the Bank raised rates for the first time in a decade in early November, it said it expected inflation would hit 3.2 percent in October before starting to fall slowly towards its 2 percent target.

“Red faces all round as UK inflation fails to rise as widely expected, not least by the Bank of England,” said Chris Williamson, chief business economist at financial data company IHS Markit.

Sterling fell against the dollar and British government bond prices rose as markets lengthened the odds slightly on a new BoE rate hike in the foreseeable future.

Most economists polled by Reuters after the Nov. 2 rate rise said they did not expect the Bank to raise rates again until 2019. On Tuesday financial markets – which tend to take a more hawkish view – priced in no increase until late 2018. BOEWATCH

While inflation in many developed countries remains weak, in Britain it has surged from just 0.5 percent at the time of the June 2016 vote to leave the European Union as the fall in the pound pushed up the cost of imported goods.

October’s data showed that lower fuel price inflation was offset by the biggest rise in food prices since September 2013.

Many economists have said this month’s rate rise was unnecessary because of the slowing domestic economy, weak productivity and wage growth, and uncertainty about Britain’s future trade relationship with the EU.

Economists polled by Reuters expect wage data due on Wednesday to show pay growth stuck at just over 2 percent.

DATA DILEMMA

The Bank argues that leaving the EU will damage Britain’s ability to grow as fast as before without generating excess inflation, and that the lowest unemployment rate since 1975 makes labour shortages and a rebound in wage growth a risk.

This month’s rate rise was not aimed at directly curbing the recent surge in inflation but at ensuring above-target inflation does not become too entrenched in Britain, especially as the United States and euro zone begin to tighten monetary policy which could further weaken the pound.

The Bank has said it still expects inflation to be slightly above target in three years’ time. On Tuesday Carney reiterated that he was allowing inflation longer than normal to return to target due to the Brexit uncertainties.

Paul Diggle, a senior economist at Aberdeen Asset Management, said inflation would pick up again due to rising oil prices and residual effects of the weaker pound.

“The Bank of England is stuck between a rock and a hard place. On balance, we think (it) will have to hike interest rates at least once more next year.”

Retail price inflation, a measure used to calculate payments on government bonds and many commercial contracts, hit a near six-year high of 4.0 percent, bad news for Hammond who is due to announce a budget plan on Nov. 22.

But other data showed that underlying price pressures are easing. Costs of manufacturers’ raw materials rose at their slowest pace since July 2016, a month after the Brexit vote.

“Our baseline case is that CPI inflation has now topped out,” Investec economist Philip Shaw said.

Source: UK Reuters

Marketing No Comments

Bank of England set for step into unknown with first rate hike since 2007

LONDON (Reuters) – The Bank of England looks set to step into the unknown on Thursday, when it is expected to raise interest rates for the first time since 2007 at a time when growth appears weaker than before any other rate rise of the past 20 years.

Having cut rates to a record low 0.25 percent in August 2016 after Britons voted to leave the European Union, the Bank is now correcting course and falling in line with the U.S. Federal Reserve and the European Central Bank, which are either raising rates or scaling back stimulus.

Whereas the United States and the euro zone are enjoying robust growth, however, Britain’s economy has grown at its slowest pace in more than four years over the past 12 months.

Quarterly growth of 0.4 percent offers the weakest backdrop to any rate rise since the Bank became independent in 1997.

True, inflation is at a five-year high of 3.0 percent, a full percentage point above the Bank’s target, but that is mainly because the pound is an average 11 percent weaker against the currencies of Britain’s main trading partners since the Brexit vote.

The Bank has often overlooked past spikes in inflation if they were caused by currency fluctuations that were deemed to be temporary.

Inflation is set to fall this time too, but only slowly, as the Bank judges domestic inflation pressures are pending.

Partly due to stagnant productivity since the 2008 financial crisis – and partly due to concerns about the effect of Brexit on immigration, trade and investment – BoE Governor Mark Carney thinks the economy cannot grow as fast as it has in the past without generating excess inflation.

“We’re in a new paradigm,” says George Buckley, an economist at Nomura who was one of the first to sense a change at the central bank earlier this year, when most economists were saying they did not expect rates to rise until 2019.

Raising rates now would be the biggest call on monetary policy Carney has made as governor, and may shape his legacy.

Carney has faced criticism from economists who say his past guidance on monetary policy has been unhelpful, and from Brexit supporters who say he is too focused on the risks of leaving the EU. But until recently his broad approach to interest rates has been fairly uncontroversial.

For most BoE watchers, the likelihood of a rate rise only became clear in September, when minutes of the nine-member Monetary Policy Committee’s meeting that month showed underlying price pressures were no longer a minority concern.

Two policymakers voted for a rate rise, and a majority of the others said they expected to do so “over the coming months”.

RAISING RATES “MAD”

Almost all economists polled by Reuters last week expect the Bank to raise interest rates to 0.5 percent from 0.25 percent on Thursday. Most do not expect another one next year and 70 percent said even one rate rise would be a mistake. The latter view is common in markets, too.

“Personally, I think it would be mad,” Jim McCaughan, chief executive of Principal Global Investors, which manages $430 billion of assets, told Reuters earlier this month.

“You’d be tightening at a time of economic softness to defend against a weakness in sterling that you need (to boost exports).”

The Bank says its policy decisions are not driven by exchange rates. When Carney gives his news conference at 1230 GMT on Thursday, he is likely to focus on a 42-year low in unemployment and how it heralds more upward pressure on wages and inflation.

The Bank has been here before, however. Unemployment has repeatedly fallen further than the BoE forecast in recent years, while wage growth has remained stubbornly around 2 percent, half the 4 percent rate associated with pre-crisis rate rises.

Investors will be keen to glean what is meant in practise by the Bank’s long-standing stated expectation that it will only raise rates “at a gradual pace and to a limited extent”.

Markets have priced in an almost 90 percent chance of a rate rise on Thursday, but then expect the Bank to wait until late 2018 before raising again, Nomura’s Buckley said.

He said that was probably too long for the BoE’s tastes. On the other hand, however, Carney will not want to box himself in or lead the wider public to believe he plans to return rates to their pre-crisis level of around 5 percent.

Economists do not expect one or two rate rises will hurt growth much unless businesses or the public think many more will come and curb spending as a result.

BoE forecasts showing inflation is still expected to exceed its target even after three years might be the clearest sign that the Bank thinks faster rate rises are needed, Buckley said.

Either way, the stakes are high both for the Bank and its governor, who has said he will step down at the end of June 2019.

“If he presides over a tightening of monetary policy and it slows down the economy, that’s what he will be remembered for,” McCaughan said.

Source: UK Reuters