Bank of Eng­land may hike rates within months

Pound surges, gilt yields jump as in­vestors an­tic­i­pate in­crease as soon as Novem­ber

The Daily Star (Lebanon) - - BUSINESS -

Sig­nal­ing that in­fla­tion is over­tak­ing Brexit-re­lated slow­down as an eco­nomic risk, Bank of Eng­land pol­i­cy­mak­ers said they’re headed to­ward rais­ing in­ter­est rates for the first time in more than a decade.

The pound surged and gilt yields jumped as in­vestors an­tic­i­pated rates may in­crease as soon as Novem­ber, far ear­lier than the pre­vi­ous con­sen­sus.That­cameaftertheBOEre­vealed that for a ma­jor­ity of pol­icy mak­ers, “some with­drawal of mon­e­tary stim­u­lus was likely to be ap­pro­pri­ate over the com­ing months in or­der to re­turn in­fla­tion sus­tain­ably to tar­get.”

While­of­fi­cial­snot­edthatBrex­it­still poses a risk to the econ­omy, they said data since their last de­ci­sion points to a “slightly stronger picture than an­tic­i­pated.” There’s also been a re­newed in­fla­tion pickup and the MPC said it’s seen signs of what could be a ten­ta­tive re­cov­ery in pay growth. That’s a key met­ric for the bank, and its ab­sence has been cited as sig­nal­ing that do­mes­tic price pres­sures are un­der con­trol.

“The min­utes struck a con­sid­er­ably more hawk­ish tone,” said Paul Hollingsworth, an econ­o­mist at Cap­i­tal Eco­nomics.

“If the econ­omy con­tin­ues to hold up, and there are clearer signs that wage growth is build­ing, then the first hike could come some­what ear­lier than we had pre­vi­ously en­vis­aged.”

The state­ment came along­side the lat­est pol­icy de­ci­sion, which saw the com­mit­tee, led by Gover­nor Mark Car­ney, vote 7-2 to hold the bench­mark rate at 0.25 per­cent. Ian McCaf­ferty and Michael Saun­ders main­tained their push for a 25 ba­sis­point in­crease, which would re­verse the rate cut put in place af­ter the Brexit vote in 2016.

While leav­ing the Euro­pean Union has cast a shadow over the eco­nomic out­look, the re­sult­ing drop in the pound has also pushed up in­fla­tion, cre­at­ing a dif­fi­cult bal­anc­ing act for Car­ney. The BOE now sees the rate of price gains ex­ceed­ing 3 per­cent next month and re­main­ing above the 2 per­cent tar­get for years.

The MPC Thurs­day also re­it­er­ated a warn­ing from its Au­gust meet­ing that mon­e­tary pol­icy could need to be tight­ened “by a some­what greater ex­tent” than mar­ket rates im­ply. That state­ment by it­self did noth­ing to shift mar­kets, un­like the lat­est com­ments.

The pound was up 1.2 per­cent to $1.3371 as of 3:20 p.m. Lon­don time. The odds on a 25 ba­sis-pointrate in­crease by Novem­ber rose to about 50 per­cent fol­low­ing the an­nounce­ment com­pared to 40 per­cent just be­fore­hand. A hike is fully priced in for Fe­bru­ary 2018.

“The BOE have been up­ping the rhetoric and this was one of the fi­nal hur­dles in their com­mu­ni­ca­tion steps,” said Jor­dan Rochester, a for­eign-ex­change strate­gist in Lon­don at No­mura. The bank’s econ­o­mists pre­dict a hike at Novem­ber’s meet­ing.

There’s a his­tory of false dawns when it comes to Car­ney and rate in­creases. In June 2014, he said that rates could rise sooner than mar­kets ex­pected, though the BOE never fol­lowed through, ul­ti­mately loos­en­ing pol­icy two years later af­ter the Brexit vote. How­ever, the eco­nomic back­drop has changed since. In­fla­tion, be­low 2 per­cent back then, is now closer to 3 per­cent, and un­em­ploy­ment has fallen sharply to be­low the BOE’s equi­lib­rium level.

In its lat­est anal­y­sis, the MPC said the amount of spare ca­pac­ity ap­pears to be dis­ap­pear­ing faster than an­tic­i­pated. BOE staff see over­all eco­nomic growth on track for 0.3 per­cent in the third quar­ter. – Bloomberg News

An auto se­cu­ri­ti­sa­tion is seen as a clear mea­sure of jit­ters over ris­ing con­sumer credit in the U.K.

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