Finance News

Carney: Rates could rise sooner than expected

|
8th February 2018
"It will be necessary, likely to be necessary, to raise interest rates to a limited degree in a gradual process but somewhat earlier and to a somewhat greater extent than we thought in November."

Interest rates could rise sooner and by a greater extent than previously expected, Bank of England governor Mark Carney has announced, forecasts for the UK economy have been upgraded.

The Bank now expects GDP growth of 1.8% in 2018, up from the 1.6% predicted in November, according to its February Inflation Report.

Discussing inflation, Carney said: “In order to bring it back to target over a more conventional horizon which means moving it in from that three year horizon that it will be necessary, likely to be necessary, to raise interest rates to a limited degree in a gradual process but somewhat earlier and to a somewhat greater extent than we thought in November.”

Ben Brettell, senior economist at Hargreaves Lansdown, commented: "The Bank upgraded its forecast for the UK economy slightly today, citing stronger global conditions. It now expects 1.8% growth this year, as against 1.6% forecast in November. Policymakers also said they will try and bring inflation back to their 2% target more quickly than previously, which means rates could rise faster and further than investors had expected. The Bank’s rhetoric echoed that of September’s meeting minutes, which preceded the November rate hike.

"It now looks like the next rise could happen as soon as May – the next time the Bank’s economic forecasts are due to be updated. Prior to today’s announcement, markets were factoring in a 50% chance of a rate rise in May, and an 80% chance they’ll be higher by the end of the year.

"On the subject of Brexit, the Bank sounded a note of caution, saying it remained the key source of uncertainty. Future decisions on interest rates will therefore depend heavily on progress in negotiations with the EU."

Jacob Deppe, head of trading at online trading platform Infinox, added: “In November the expectation was that the interest rate hike was a ‘one and done’ affair. Now it seems we could face two rate hikes this year: one in May and another in the Autumn.

“Not everyone is convinced two rate hikes is the way to go, expect some market participants to play the other side of this trade.

“What was perhaps most interesting from the minutes of the Monetary Policy Committee’s meeting was the unanimous agreement that inflation above 2% for the next three years was something it was no longer willing to tolerate.

“It is perhaps worth questioning whether the MPC feels the need to eradicate inflation now ahead of the Brexit deadline given the dire economic forecasts released overnight.

“Bank of England governor Mark Carney is probably looking to give the Bank some buffer with interest rates, providing room to cut when Brexit goes through next March.

“But interest rates will only rise in May if the economic data continues to point to stronger economic growth than previously anticipated. Ultimately, the economy is still very much at the mercy of Brexit, so the Bank won’t be in a rush to act if the data doesn’t support it."

Related articles
More from Finance News