The Bank of England has held rates at 0.5 per cent but a rate rise could happen in the ‘very near future’, according to experts.
One goes as far as to say the Bank of England appears ready to hike rates in May bar any major shock to the UK economy. This is thanks to stronger inflation, wage growth improvement and record-high employment.
Ian Kernohan, economist at Royal London Asset Management, explains: ‘The latest Inflation report significantly raises the risk of a rate hike in May. 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.
‘Although the rate of GDP growth remains modest, the Bank believes that trend growth has fallen. Inflation is still expected to fall back gradually, however the MPC notes some firmness in wage growth and expects that pay growth will rise further in response to a tighter labour market.’
Silvia Dall’Angelo, senior economist at Hermes Investment Management agrees with Mr Kernohan views, saying today’s MPC meeting ‘laid the groundwork for a rate hike in the very near future.’
Ms Dall’Angelo adds: ‘Following the November hike (the first one in a decade), it now looks like the Bank is eyeing May for the next move, provided general conditions allow for it.
‘There are other unvoiced reasons why an additional rate hike might be desirable. It would beef up ammunitions to face the next crisis when it happens. It would allow the Bank to avoid a too wide rate differential vs the US Federal Reserve, in turn contributing to stabilising the currency. Last, but not least, it would help coping with rising financial stability concerns.’
‘The Bank is likely to change its tune again’
However, there is a healthy amount of scepticism as to whether rates can go up at such a consistent pace. Abi Oladimeji, chief investment officer at Thomas Miller Investment, comments: ‘In November 2017, when the Bank of England raised interest rates for the first time in over 10 years, it indicated there could be two further hikes of 0.25 per cent over the next three years. Less than three months later, the rate setting committee apparently now believes earlier and more frequent increases are needed.
‘The Bank’s views appear to be predicated on ongoing strength in the global economy fuelling better than expected growth and higher inflation in the UK.
‘In our assessment, the pace of global economic growth is more likely to moderate than to accelerate in the year ahead and UK inflation pressures are likely to ease gradually. Given a few months, the Bank is likely to change its tune again.’
This article was originally written by our sister publication Moneywise.
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