- BI Graphics
- Analysts are unanimous in their belief that the Bank of England will hike interest rates on Thursday. Rates are set to increase from 0.25% to 0.5% in the bank’s first hike since 2007. Forecasters differ on whether or not the increase will be a good idea.
LONDON – On Thursday at noon, the Bank of England will be the most watched central bank on earth, as it announces the decisions from the November meeting of its crucial Monetary Policy Committee. If the markets are to be believed, there’s a nearly 90% chance that the bank will raise its base interest rate.
Doing so would mark the first increase in rates since 2007, before the financial crisis forced the bank to aggressively cut rates in order to cope with the shock brought to the British economy. After the crisis ended, the bank remained on hold for more than seven years. Between 2009 and August 2016 the base rate stayed at 0.5%.
It then dropped to 0.25% after the bank’s emergency cut in August, which intended to soothe the economy in the immediate aftermath of June’s Brexit vote.
Now however, the year and a quarter of 0.25% rates looks to be coming to a close, as Bank of England Governor Mark Carney and his MPC assess the need for higher rates in the UK economy.
At its simplest level, the policy dilemma facing Britain’s central bank is that it must balance surging inflation brought on by the weakened pound since the referendum, with the slowdown in the economy, dwindling consumer spending and declining inward investment. If the central bank keeps interest rates low, the risk is that inflation will get worse. If it raises them, the risk is that it might further dampen the economy.
Until the last couple of months, the weakening macroeconomy since the Brexit vote has held sway in the minds of most BoE ratesetters, but with inflation hitting 3% in September, and growth strengthening from 0.3% in Q2 to 0.4% in Q3, it seems pretty much inevitable that Britain will see a return to a base interest rate of 0.5%.
Analysts are pretty much unanimous about that. Of the dozens of research notes from major banks, asset managers and research houses seen by Business Insider in recent weeks, not a single one sees anything other than a hike on Thursday.
What they do differ on, however, is whether or not a hike is a good idea. Some analysts believe that the bank simply can’t ignore the fact that inflation is currently 50% above its 2% target and must hike now, while others believe that the macro environment simply isn’t suited to increasing rates, with the UK’s sclerotic productivity a major concern for many.
Business Insider decided to round up a handful of the most interesting analyses from major firms, including charts when appropriate, which you see below.
Mike Bell, Global Market Strategist, JPMorgan Asset Management
- Quartz / Atlas
Their view: Markets are ready for a hike, and the reaction is likely to be subdued.
What they say: “Market reaction should be relatively muted if a rate rise is delivered. That said, if the Bank of England gets cold feet and delays raising rates, sterling and gilt yields are likely to fall.
“If the Bank does raise rates, as expected, it is doing so against a weak growth backdrop, signs of weakness in the London housing market and a still hugely uncertain political outlook. Inflation is high predominantly because of the fall in sterling caused by the Brexit referendum result, not because of a strong domestic economy.
“The market only expects one additional rate rise next year, on top of the one this week, and is unlikely to price a more aggressive rate hiking cycle until there is more evidence that low unemployment is starting to feed through into an acceleration in wage growth, which may or may not materialise.
“The ongoing Brexit negotiations put the Bank of England in a challenging position: they have to try and set monetary policy based on the medium term outlook for the economy when the economic outlook has rarely been so uncertain and opaque.”
Peter Thorne, Senior Financial Analyst, Charles Stanley
Their view: A hike will be a “double-edged” sword for the UK’s banks.
What they say: “Rock-bottom interest rates have been terrible for UK banks’ profitability, but any interest rate rise – which increases the amount they earn on interest free balances – could actually be a double-edged sword.
“Higher interest rates will boost UK banks’ net interest income but the equity market is increasingly concerned about the slowdown in the UK economy and the negative effects it could have on loan growth and bad debt charges which a rate rise might worsen.”
Martin Beck, Lead UK Economist, Oxford Economics
- Oxford Economics
Their view: A hike, but a finely balanced decision.
What they say: “September’s meeting saw a majority on the MPC conclude that a rate rise ‘was likely to be appropriate over the coming months.’ But with the macro data soft and public caution from some members, November’s decision looks finely-balanced, if erring towards a hike.”
“If it goes for a hike on 2 November, the MPC can point to an absence of downside surprises in support of such a move. But the case still looks weak. GDP growth of 0.4% in Q3 was above the Bank’s expectation, although growth in 2017 has undershot the average pace since the current expansion began.”
“As to how November’s vote might go, two of the Bank’s Deputy Governors, Sir Dave Ramsden and Sir Jon Cunliffe, have been clear that that they are not part of the hawkish majority. A third MPC member, Silvana Tenreyro, indicated that she is in the latter camp, but not that a hike was needed imminently. So any vote for a rise won’t be unanimous.”
Samuel Tombs, Chief UK Economist, Pantheon Macroeconomics
- Pantheon Macroeconomics
Their view: Reasons for the BoE to stay on hold, but a hike is coming.
What they say: “The MPC likely will raise interest rates on Thursday, for the first time since July 2007, in response to the uptick in GDP growth and the upside inflation surprise in Q3. The Committee, however, likely will not unanimously vote to hike, and its new medium-term inflation forecast will be lower than in August.
“As a result, we think that the MPC will drop its guidance that interest rates could rise to a greater extent than markets anticipate. Events on Thursday likely won’t lift either sterling or gilt yields.
“We think the case for the Committee to stand pat on Thursday is still quite strong. Since the MPC last met, in mid-September, employment growth has weakened while domestically-generated inflation has remained subdued.”
Kallum Pickering, Senior UK Economist at Berenberg
- Reuters/Frank Augstein
Their view: The Bank of England won’t want to disappoint the markets, so will pretty much be forced to hike.
What they say: “Any chance the BoE won’t hike? Of course there is always a chance. But it seems incredibly small. When markets responded to Carney’s comments last month that ‘some rise in interest rates over the coming months may be appropriate’ by bringing forward estimates of the first hike from as 2019 to November 2017, the BoE has had ample opportunity since then to re-adjust the market’s expectations.
“That the BoE has not attempted to influence the market since the governor’s remarks signals it is satisfied with current pricing. When it comes to monetary policy, talk matters almost as much as action. Now that the market is ready and waiting for a hike this week, the BoE would risk a major hit to its credibility if it did not meet this expectation. In short, if the BoE didn’t intend to hike it probably would have told us by now.”
Moyeen Islam, Barclays
Their view: Growth is not at levels traditionally associated with a hike, but that won’t stop the BoE.
What they say: “It is worth noting that in the past when the MPC had chosen to tighten the policy rate, quarterly GDP growth was around 0.7% q/q. But if the MPC now views trend growth as being lower than in the pre-crisis period, and it is becoming increasingly more concerned about the erosion of slack within the economy, then, clearly, the hurdle to hike is materially lower than in previous episodes.
“It is this view of the progressive erosion of slack and lower trend growth that lies at the heart of the hawkish MPC view. Simply, this view expects that if the economy is growing at close to or above trend, then the risks to higher inflation are progressively increasing and that would leave medium-term inflation incompatible with the 2% CPI target.”
Oliver Harvey, Macro Strategist, and Mark Wall, Chief Economist at Deutsche Bank
- Deutsche Bank
Their view: A hike on Thursday could be the first of many.
What they say: The Bank of England finds itself in an uncomfortable position. After resisting calls for higher rates during most of the post-crisis period, the MPC is about to tighten just as many doubt its ability to follow through. The market is not quite pricing a policy mistake. But with only three hikes discounted until late 2020 including one on Thursday, and at a rate of 10bp of hikes per quarter versus an average of 40bp in tightening cycles since the early 1990s (see figure 1), it is not far off either.
Given the above, stronger-than-expected recent data, and the MPC’s shift towards supply concerns in recent months, we think risks are tilted towards a hawkish spin at Thursday’s meeting and suspect the MPC will push back against any characterisation of ‘one and done.’
Sebastien Cross, Bank of America Merrill Lynch
- REUTERS/Brendan McDermid
Their view: One and done from the Bank of England.
What they say: “The first estimate of GDP for Q3 released last week came in above expectations at 0.4% qoq. As the last significant data point before the BoE meeting there seems little to stop the BoE hiking 25bp. We continue to expect no further hikes thereafter as we forecast inflation to fall quickly back to target in the first half of next year. Therefore with the market pricing in almost 1.5 further hikes for 2018, we like micro-flatteners in the front end of the curve.”