When is the Bank of England Raising Interest Rates? Bank of America Merrill Lynch Give Their Verdict
- Written by: Will Peters
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The Bank of England (BoE) is tipped to raise United Kingdom base interest rates in August 2015 according to a new analysis at Bank of America Merrill Lynch Global Research (BofA).
However, May could be another close contender and should not be discounted.
BofA have, alongside many in the markets, pushed back their expectations for a BoE interest rate rise from February 2014.
Much of the 2014 rally in the pound exchange rate complex has been based on the assumption that the BoE would lead the G10 economies in raising interest rate rise.
Some saw the possibility of a rate rise coming as early as the end of 2015.
However, the September declines in the pound have come as markets pushed back on these expectations - the major culprit? The slowing eurozone economy.
Eurozone Economy Stutters and Alters BoE Timing
"Re-pricing of BoE rate expectations over the last couple of weeks. Indeed, notwithstanding changes in holiday timings in Germany unhelpfully adding additional weakness to the data, our Euro area economists have taken a modestly more downbeat view of growth prospects there of late," says Nick Bate at BofA.
The boos that the UK economy was expecting from the gradual improvements in Euroarea growth is now seen as a more distant prospect.
Furthermore, the recent market slump which has seen the FTSE 100 dip by 10%, will also hit UK growth.
Bate estimates that the dip in the FTSE 100 will likely dampen GDP by around 0.25pps over the next few quarters.
Guessing the Interest Rate Hike
Putting an exact month for the first rate hike in 8 years at the BoE is understandably a tough call.
Nevertheless, there are some general guidelines and assumptions deployed by BofA to aid their decision making.
"It seems reasonable to forecast the BoE first raising rates in an Inflation Report month, as it gives them a good vehicle through to which to assess in depth the need for a first rate rise since 2007 and explain the decision in the accompanying press conference," says Bate.
Therefore we have May and August on the calendar.
May 2015 is when we get UK elections - the Bank will unlikely choose this politicaly volatile moment to raise interest rates.
Furthermore, with the current jitters over the Eurozone the markets have overwhelmingly moved back their predictions for a rate rise in May.
August is then the next best bet suggest BofA.
"We think it is worth pushing out our expectation of the first BoE rate rise to August, with the risk that if the Euro area manages to muddle through its renewed stresses again, the profile of BoE rates over the next couple of years could be somewhat stronger than the market is currently pricing," says Bate.
