Bank of England Interest Rate Rise Coming in May say UBS as they Raise Economic Growth Forecasts
Economists at global financial services giant UBS have told clients they believe the Bank of England will raise interest rates in May.
The decision to lift rates in May would represent the second interest rate in months by the Bank of England and could well prove supportive to Sterling's multi-week uptrend.
UBS strategist John Wraith believes any decision to raise interest rates at the Bank will have its basis in the better-than-expected outturn in UK economic activity.
Indeed, UBS economists have also advised they are raising their GDP forecasts for the UK economy with GDP for 2018 now seen at 1.4%, up from 1.1% previously. 2019 growth is forecast at 1.2% in 2019, up from 1.1%.
Consensus estimates are for UK economic growth to be at 1.4% in 2018, while the more bullish forecasters such as Capital Economics see growth being as strong as 2.0%.
"While we still expect the Brexit process to generate strengthening headwinds for the UK economy for a considerable time, the stronger than expected outturn for Q4 GDP and the better momentum the economy starts 2018 with as a result could give the MPC a window of opportunity to raise Bank Rate by the middle of the year," says Wraith.
Of concern to Sterling traders will however be the timing of any subsequent follow up rate rise, i.e. a second move in 2018. Wraith warns that any interest rate rise will however be "explicitly conditional" on a transitional deal with the EU being agreed by March.
This week the Bank of England Governor Mark Carney appeared before UK lawmakers with the message that the UK economy has grown to the extent that employment was close to saturation point, and as such wages could be expected to start accelerating.
Such an acceleration in wages would add domestically-generated pressures on UK inflation, something that Bank has been increasingly concerned with since it recently peaked at 3.1% which is well above the desired 2.0% target.
The important thing with policy now ... is that as ... slack in the economy has been taken out, we move into a more conventional area for monetary policy, where the focus is increasingly on returning inflation sustainably to target over an appropriate horizon,” said Carney.
"The BoE sees reduced risks of monetary tightening derailing the economic expansion and therefore a decision to raise rates is more easily made if there is any further evidence of an inflation slippage from target," says Derek Halpenny at MUFG. "So his comments were pretty clear to us – the risks are piling up that the BoE will be much more active than implied by current market pricing."
