UK Interest Rate Decision: Predicted Rate Rise

The Bank of England is so widely expected to raise rates tomorrow that for it not to happen would be a big surprise and potentially undermine the Bank’s credibility with investors.  Expectations are for a quarter point rise, in essence taking back the cut made in the wake of June 2016’s UK vote to leave the EU. 

With a hike in itself not being a surprise, attention will focus on accompanying commentary as investors try to assess the direction of future policy.  The fact that the time lag between a rate rise and any measurable impact on the economy is 6-12 months means that the Bank does not have the luxury of a “wait and see” approach to monetary policy.  This would guarantee it being behind the ball, making the Bank’s view on the causes and direction of inflation key.  The market seems to be pricing a “one and done” hike so hawkish commentary on inflation would put upward pressure on yields.  History would tell us that at the current low levels of unemployment, wage inflation is waiting in the wings and without a large pool of labour to draw on (and in the absence of meaningful improvements in labour productivity) near term real GDP upside is capped in the UK.  These considerations may also drive a more hawkish tone to commentary, despite weaker headline GDP growth. 

While the rise in rates will be small (and subsequent rates will still be very low in a historic context), it will have an impact on consumers as banks pass any rise on to their mortgage customers.  The feed through to mortgage rate changes will have a direct effect on disposable income though any accompanying rise in Sterling will mitigate inflation to some extent. 

Andrew Herberts

Head of Private Client Investment Management (UK)

 

Commentary first appeared in:

Portfolio Adviser - Predicted rate rise: One-and-done or the start of tightening? (on 1st November 2017)

Morningstar UK - Will It Be ''One And Done'' For Interest Rate Rises? (on 1st November 2017)

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