Bank of England Review: Brace for Rate Hikes

Today, the Bank of England’s (BoE) Monetary Policy Committee (MPC) completed its two-day policy meeting.

In their meeting, the committee voted unanimously to leave the interest rates at the current level of 0.5%. The traders expected this.

What the traders didn’t expect was the committee’s deep statement. In the statement, they unanimously agreed that there were chances of interest rates rising earlier than expected.

As we wrote yesterday, traders were expecting three rate hikes this year with the initial one coming in May. In addition, as we mentioned, the current meeting came at an interesting period in the financial markets where volatility has risen and the global stock markets. Also, the meeting came at a time when there are uncertainties in the UK, crude oil are rising, and the inflation rate is above the target.

In the meeting, the committee unanimously agreed to set the inflation rate target of 2% and agreed to raise the growth forecasts of the UK economy. They also agreed to maintain the stock of the non-financial investment-grade corporate bond purchases at 10 billion pounds. They also voted to maintain the bond purchases at 435 billion pounds. This language was similar to that of their September meeting which came a month before the first hike.

In the highly anticipated letter to the chancellor, Carney said:

“Monetary policy would need to be tightened somewhat earlier and by a somewhat greater extent over the forecast period than anticipated at the time of the November report.”

There are downsides to the MPC’s projections. First, the policy statement did not factor in the case for increasing oil prices. Today, the price of crude oil has soared to the highest level in three years, which could affect the country’s inflation. For the short term, Carney suggested that inflation could accelerate.

Also, the meeting did not factor in the risks presented by the Brexit. In their statement, the committee agreed to forecast the growth leaving all factors on Brexit constant.

Before the meeting, traders were waiting for the language of the statement. They wanted to hear whether any committee member would dissent and bring more hawkish views.

Traders were also waiting for the language Mark Carney would use in the press conference. In the conference, Carney talked about their thinking about the current UK economy, the uncertainties ahead, and the risks associated with Brexit.

On the economy, he said that the committee expected the UK economy to continue growing, with the unemployment rate slowing, and wages rising. On the uncertainties surrounding Brexit, he said that future forecasting was still possible even with these uncertainties.

After the interest rate decision, the pound, which was trading lower against the dollar, rose to the highest level since Monday. As of this writing, it is trading at the 1.3976 level.

Before the decision today, traders expected the bank to have 3 more rate hikes this year with one coming in May. Today’s statement suggested that the hike could come early and forecasted two more hikes in the next three years.

In the press conference, Carney made it clear that the rate hike program, which is two years behind the Fed, would be better for jobs and maintaining the inflation rate. He also maintained that the hike will be gradual and that the committee will use forward guidance to warn investors beforehand.

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