With Governor Carney’s speech slated for Thursday at 12.30 GMT, markets are pushing back their glasses pondering if this might be the first UK rate hike in almost a decade – even though most analysts previously expected a hike within two years.
The UK economy experiencing unexpected growth fueled the interest rate hike assumption. Towards the end of last week, a 0.4% economic growth was reported even though it was forecasted to reach 0.3%.
Although these are all hard facts, even with all the analyst conjecture – ultimately the decision lies with the members of the BoE and some don’t seem completely convinced it’s time for a hike. BoE Deputy Ramsden said that signs domestically indicating increased inflation aren’t strong enough yet. Silvana Tenryro a BoE external member consulting the central bank on monetary policy said a rate hike could cause economic growth to slow down. The current 0.25% set on August 2016 was passed as a protective buffer during Brexit.
The hike contrarians – are looking through a much wider scope, contrasting this year’s growth with 2016’s numbers which pales in comparison. Many analysts believe that Ramsden and Tenryro are a minority – other analysts are postulating a 90% possibility of a rate hike during the next meeting. Pro-hike BoE members are pointing towards inflation as the reason behind increasing rates – which at the moment is at 3% and further highlighting the extremely high 5% inflation rate in 2012 (cited as the last time the BoE held interest rates unmoved). Proponents of a hike, also mention a drop in unemployment bringing it to its lowest level since the 1970s.
There was a practical eschatology surrounding the Brexit with economic/trade doom and gloom – but the GDP, CPI and other indicators such as unemployment frequently outperformed analysts’ forecasts. The already complex algorithm regarding the interest rate decision becomes further convoluted with the matter of credibility – holding the current interest rate might discredit the institution that has been talking coyly about a hike since the beginning of the year. This might result in markets yawning like indifferent adolescences the next time any of the BoE officials mention “potential rate hike”.