Lloyds Bank Forecast UK Interest Rate Rise in August

Lloyds Bank have succumbed to the will of money markets and pushed back their expectation for first UK interest rate rise to August 2016.

We have reported before that Lloyds had February pencilled in as the date for the first rate rise.

At present money markets are pricing in the first interest rate rise to occur in early 2017 – markets and analysts at leading institutions typically differ in their predictions with the latter typically being more aggressive in their calls.

On the 18th of November Monetary Policy Committee member Ben Broadbent gave his views on the matter saying markets may be a little too relaxed over their timing of rate rises.

If Broadbent is dropping a hint then markets will have to bring forward their expectations. If this is the case then interest rate yields and the British pound will have to rise.

"Although we have shifted our forecast for the timing of the first rate rise, market expectations have actually closed in," note Lloyds, acknowledging the rise in interest rate futures and sterling over recent weeks.

Nevertheless, analysts at the UK bank see it fit to move their date further back and closer to the market’s prediction but say the reason for the move is the recent Bank of England Inflation Report.

"We now see Bank rate ending 2016 at 0.75%, compared with 1% previously. As a result, we have pared back our UK 2-year bond yield forecast for March 2016 to 0.9% from 1.2%," say Lloyds in a monthly forecast note.

The Bank of England’s new forecasts indicate that headline CPI inflation is now expected to stay below 1% until the second half of 2016, returning to target only in late 2017.

There was still only one dissenter (Ian McCafferty) on the MPC in favour of an immediate rate hike at the November meeting, suggesting that other ‘hawks’ are more cautious about tightening policy than many had expected.

UK GDP was estimated to have eased to 0.5%q/q in Q3, though there are signs from survey evidence that the economy started Q4 on a firmer footing.

"Nevertheless, the profile for expected inflation means that the MPC appears to have signalled a later start to the tightening cycle," say Lloyds.

Although the MPC has sounded more dovish of late, their rhetoric could change rapidly if the exchange rate comes under pressure and/or other domestic inflation indicators turn higher.

There are already signs of rising domestic cost pressures from a tightening labour market: the unemployment rate is at a 7-year low (of 5.3%) and wage growth is picking up (to around 3.0%).

In fact if it weren't for low global oil prices the inflationary outlook would look very different. If oil and gas were to start rising the Bank may have to start agressively targetting the interest rate.