Will the Bank of England Raise Interest Rates This Year? The Latest Views

Divergent opinions continue to pepper the debate about when the Bank of England (BoE) will hike rates.

Within a wide spectrum of views on when the BOE will first raise interest rates there are those at one end who are still clinging to the possibility of a May 2016 rate hike; whilst other’s see no change until 2017.

Normally it would be expected for the BOE to follow in the footsteps of the Fed, however, since the Fed raised their rates there have been no signs the BOE is looking to do the same.

Indeed money market rates, often used as a barometer of expectations, have continued to point to a near-negligible expectation of a near-term hike - focusing instead on late 2016.

U.K Gilt yields actually fell post-FOMC - as opposed to the expected rally - after traders saw no signs the BOE was going to copycat its cousin over the pond. 

The Consensus View

The majority of experts expect a “marginal” hike at the end of 2016, according to a recent survey conducted by the Economist and published in the Financial Times two days ago.

72 of the 105 financial experts interviewed expected a “marginal end of year” rise of between 0.5% and 1.0%.

One such voice which embodies the majority view is that of Petr Krpata, a strategist on ING Bank’s FX team, who sees the pound pressured going into 2016, with Brexit “risk premia” dominating the evaluation of the currency, however, in relation to rate hike expectations, revealed a stance much more in keeping with the ‘consensus’:

"We now see a very decreasing probability of the May rate hike, in the context of the recent speeches and views from the various MPC members.

It now looks likely that the BoE may only hike in Q4 16, after the EU referendum (provided it will take place in Q3 16 or early Q4 16).”

Indeed in a recent speech Minouche Shafik said she did not see a case for a rate hike until there was consistent wage growth; unfortunately despite a spurt higher during 2015 wages plateaued towards the end of year, missing expectations at the last result.

Early Hikers

Only five of the 105 in the survey saw a rise as early as May, which seems appears to be the earliest clustering on the spectrum.
One high priest of the ‘early hike’ is former MPC hawk, Andrew Sentence, who is now an advisor to PWC, and has been calling for a rate hike for some time:

“It is extraordinary that there has not been any rate rise yet, and my main worry is that when rate rises do start, they will be more rapid than most people are expecting. The Bank of England’s communication has been poor and confusing, compared with the Fed which seems to have prepared well for its first post-crisis rate rise.”

Other analysts who previously expected a May hike, have softened their view, following a string of recent poor data releases, as well as increasing Brexit fears.

Writing after the most recent Manufacturing PMI ‘fail’, Banca IMI’s Daniel Vernazza said his May call still stood but with growing risks of a delay:

“We still forecast May for the first BoE hike, with the risks skewed towards a later hike. We think the BoE is behind the curve: spare capacity in the UK economy is close to zero and inflation is currently below target because of the fall in global commodity prices (and its impact on inflation is temporary). They should have already hiked.”

One risk factor which could delay the BOE, according to Vernazza is that U.K growth has stalled and is probably entering a down-trend:

“Increasingly, we’ve had to emphasize the risks that they delay further. That’s because the economy is slowing (actually it’s been slowing in line with our GDP forecasts set two years ago) and we expect GDP growth to slow further to 1.9% this year (consensus 2.4%) and for the balance of growth to be increasingly lopsided towards services and household consumption. “

This reiterates the view recently propagated by SocGen’s lead analyst Kit Juckes, who, said U.K growth had passed its peak, and rate hikes if or when they come will be ‘too late’ as they will have missed the cycle.

Preference for Macroprudential Policies

Perhaps more significantly Banca IMI’s Vernazza argues that the debate about rates might be a red herring altogether, as the BOE may turn instead to more targeted policy measures to ensure specific parts of the economy such as high-street lending do not overheat:

“it looks increasingly likely that the BoE will try to use its new macroprudential toolkit as the first line of defence against risks to financial stability, in an attempt to keep interest rates lower for longer. Slower economic growth and faster credit growth make this more likely. As I’m sure you know, consumer credit growth is running at 8.3% yoy, and rising. And there is the growth of buy-to-let.”

The Far End of the Spectrum

At the extreme late end of the spectrum are doves such as AFEX’s Lucy Lillicrap, who, in mid-December, following a strong November employment report, still saw no reason to update her view that the first rate hike would occur in early 2017 – broadly due to still-pressured inflation:

“When deciding the course of UK interest rates the MPC’s primary target is to maintain inflation at 2% 2 years out which last month’s inflation report suggested was still some way off.

So all in all while the employment survey was positive news it will probably not be enough on its own to change the current thinking at the MPC on when to raise rates with the markets still not fully pricing in the first UK rate rise until early 2017.”

According to Lillicrap overnight index swap rates continued to point to a market-based forecast in late 2016- to- early 2017.