UBS thinks BOE could hike rates again in May
The Bank of England (BOE) could increase interest rates as early as May, according to UBS, far sooner than expected by most analysts.
But this will happen only if the UK government is able to strike a deal with the European Union over a transition period after it leaves the bloc in March 2019, UBS said.
The UK central bank’s monetary policy committee (MPC) “is expected to raise rates in May, if a transitional deal has been struck”, UBS strategist John Wraith said, CNBC wrote.
UBS has changed its forecast for the next rate hike, now predicting a 25 basis point hike in May that would take the rate to 0.75 percent. However, the bank’s global research unit made its prediction “explicitly conditional on a transitional deal being agreed by March”.
The BOE made its first interest rate rise in a decade in November, but has signaled that there would be ‘very gradual’ further increases over the next three years and these would be tied over progress in Brexit negotiations.
Most analysts had thought the next rate rise would come later in 2018 and in November at the earliest, making the UBS note stand out for its May forecast.
UBS said the rates rise could come in May amid a strengthening UK economy.
“While we still expect the Brexit process to generate strengthening headwinds for the UK economy for a considerable time, the stronger-than-expected outturn for fourth quarter gross domestic product and the better momentum the economy starts 2018 with as a result could give the MPC a window of opportunity to raise bank rate by the middle of the year,” Wraith wrote.
“However, there are growing doubts about whether the UK and EU will agree on a transitional deal by the time of the EU Council Summit in late March, and failure to do so would in our opinion stay the MPC’S hand as uncertainty intensifies and the economy slows more materially.”
UBS revised its forecasts for UK GDP following stronger further quarter growth, seeing growth at 1.4 percent in 2018 and 1.2 percent in 2019 — up from a previous forecast of 1.1 percent for both 2018 and 2019.
“We still expect the pace of growth to slow over the course of 2018, whether a transitional deal is agreed early or not. We believe a near-term resolution would not address the difficulties of arriving at longer term arrangements that are economically favorable to the UK, nor will it diminish the acute domestic political risks that both increase the complexities of the Brexit negotiations and are likely to keep investment activity subdued.”