High inflation is the Bank of England’s main reason for wanting to raise rates.
So all this points to an expectation that Base Rate will rise sooner rather than later and some economists are predicting an increase in May.
The central bank has raised its economic growth projection for the coming year to 1.8 percent from 1.7 percent last time, largely because it has raised its global growth forecast to 4 percent from 3.75 percent.
While policymakers voted unanimously to keep interest rates on hold at 0.5%, there were signs that further increases could be on the way. The same day, the Reserve Bank of India kept its policy rate unchanged, to “carefully” nurture economic growth. Assuming there is no major economic shock, the Monetary Policy Committee (MPC) has judged that monetary policy needs to be tightened somewhat earlier, and somewhat more, than anticipated in November. That would represent a big change from the BoE’s signal as recently as November of two hikes over the next three years.
“With the economy seemingly now on a firmer footing, borne out by a modest upgrading of the 2018 GDP growth forecast in the Inflation Report and slack limited and diminishing, the MPC believes there is a reduced case to tolerate above target inflation”. That was upgraded from previous guidance of 1.7 percent.
Although British inflation has been running well above its 2 percent target, due in large part to the fall in sterling after the Brexit vote, the BoE has raised rates only once so far since the 2007-09 financial crisis – in November – while the U.S. Federal Reserve has raised them five times.
It leaves the door open to a potential rate hike as soon as May, with markets also now pencilling in more than three hikes within three years.
If you look at our 2018-19 forecast, and if you make adjustments for HRA, going forward the inflation rates are still around 4.5 per cent.
Ian Kernohan, economist at Royal London Asset Management, explains: “The latest Inflation report significantly raises the risk of a rate hike in May”.
“Along with high rates of profitability, the low cost of capital and the diminishing spare capacity, strong global activity is also supporting business investment”.
Sterling jumped on the announcement, with expectations of more rate hikes bullish for the UK’s currency.
But a small increase won’t be a huge benefit to people – as an initial expected hike of 0.25 per cent rise on a balance of £2,000 will mean just £5 more in interest.
Higher inflation is also the enemy of the bond investor and so anyone with fixed-rate savings accounts, or money in United Kingdom gilts, will not welcome Thursday’s news.
The sector is “teetering on the edge of contraction,” and possibly heading towards recession in 2018.
The Bank of England said it expected the economy could only grow by 1.5% a year before it started to generate too much price pressure.
However, analysts suggest the higher MSP on farm commodities would give rise to food inflation during the procurement season starting June, which could force the RBI to reconsider its current stance on the monetary policy. “The outlook for global growth appears to have strengthened somewhat further over the past three months”, the Inflation Report said.