Bank of England Interest Rate Rise in November say Lloyds

The first UK interest rate hike in a new cycle of increases will come in November say analysts at Lloyds Bank Research.

The news from Lloyds comes as the British pound is bid higher as markets are warned by the Bank of England that they may be wrong-footed on their timing of the first hike.

Money market rates suggest that the first rise in the Bank Rate will not take place before Q3 2016.

Meanwhile a Reuters poll of nearly 60 economists, taken over the past week, suggested the first move would come in early 2016.

In a note to clients Lloyds Bank say their base case is for a rise at the much earlier date of November 2015.

“We maintain our view that policy tightening begins in November, as oil prices recover and domestic price pressures such as wage growth continue to pick up,” says the note.

If you take one thing away from this piece it is this - if Lloyds are right then the pound sterling will rise rapidly in coming months because markets are simply pricing the currency too cheaply.

Misplaced Expectations

In their April MPC minutes the Bank of England told markets they were wrong on their expectations for expecting an interest rate hike in mid 2016.

Decision makers regarded the path of U.K. interest rates expected by investors as “exceptionally flat”, with a first rate increase only in September 2016 and a pace of tightening thereafter that was “exceptionally slow”.

We see this as chiming with the Lloyds view that markets are too relaxed about higher interest rates in the UK.

The Economy Now Needs Higher Rates

Amidst signs of moderating economic activity, there has been a further scaling back of UK policy rate expectations.

Of particular interest was the latest labour market data indicate that while earnings growth slowed to 1.7% on the headline 3m/12m measure from 1.9% previously

The pound has faded its rally against the euro as a result of softer wage numbers falling back from a peak of 1.42 in early March.

While wages and soft inflation pushed back interest rate hike expectations Lloyds are keen to emphasis that a combination of firm employment growth and another significant fall in unemployment pushed the unemployment rate down to 5.6% - its lowest level since mid-2008.

“Taken together, these trends point to an ongoing absorption of the economy's spare capacity  and raise the likelihood of pay pressures mounting as labour market slack diminishes,” says the bank.

In their view, these developments are likely to warrant a tightening in monetary policy by the BoE in Q4, at which point the weakness in the headline rate of inflation should have started to unwind.