Bank of England to Raise Interest Rates in 2015 Say Lloyds

Lloyds Bank have confirmed they are part of the few major institutions factoring in the first interest rate rise at the Bank of England in 2015.

Money markets are currently pricing in an interest rate rise anywhere between February and May 2016.

Going against the grain though is the economic forecasting team at Lloyds Bank who, in their latest monthly financial outlook briefing, have said they are forecasting the first rate rise to come in 2015.

While this view is ahead of consensus it is not unique; we reported last week that UniCredit Bank are also forecasting a 2015 interest rate rise.

Should Lloyds and UniCredit be correct then there are significant implications for finance as interest rates and exchange rates will be forced to play catch-up.

Above: Lloyds are ahead of market thinking in their predictions of a return to high interest rates in the UK.

It is worth pointing out that the pound has enjoyed a strong run during late May and most of June against both the euro and dollar confirming that markets are bringing forward their expectations for that first rate rise.

The continued absorption of economic slack and the associated impact on the inflation outlook underpin Lloyds Bank's bullish expectation. The UK saw wages jump 2.7 pct on an annualised basis in April confirming the productivity of the UK labour force is growing – a key requirement for an interest rate rise.

Commenting, the bank say:

"The flow of hard data for April and May have bolstered the likelihood of a solid recovery in UK GDP growth in Q2 from its Q1 soft patch. Despite the latest labour market report showing an easing in the pace of employment growth - with a rise of 114k in April relative to the level 3-months ago - more importantly, earnings growth picked up markedly over the same period, providing a strong sign that the tightening in the labour market is starting to feed through to wages."

Further evidence that the mainstream is swaying towards the Lloyds viewpoint comes as the Bank of England itself is giving tentative hawkish signs – something markets are not ignoring.

MPC member Sir Jon Cunliffe told an audience on the 22nd of June that:

“We can I think now point to an alignment of factors that suggest that productivity growth will start to move in the right direction over the next few years,”

However, perhaps the clearest hint given by a MPC member of a 2015 hike was made by Ian McCafferty who told an audience in Dundee:

“Financial markets still believe that an interest rate rise is unlikely until May or June next year, and economists suggest February or March.”

“Either of those dates and the possibility of a late rise before the end of this year are critically going to be data dependent.”

Lloyds concede, however, that the risks to their own view remain tilted towards a later rate rise.

The upcoming Budget (8th July) and the implied pace of fiscal tightening will provide the next key domestic input into the policy debate.

“Despite the potential for strong fiscal headwinds, resilient UK growth, a pickup in inflation and the gradual normalisation of UK & US monetary policy should push gilt yields higher over the medium term,” say Lloyds.