Why you should expect two interest rate rises in 2018

The EY ITEM Club suggests that the Bank of England could raise rates by 0.5 per cent by the end of this year. Interest rates are currently held at 0.5 per cent. This would come in the form of two 0.25 per cent rate hikes, believed to be in May and November 2018, although it admits the possibility of a hike in November to be a more ‘tentative’ prediction.

EY Item Club say that the Bank of England has taken a more ‘hawkish’ approach in recent months, meaning the appetite for action among members of the Monetary Policy Committee is now thought to be elevated. This is due to the ongoing high employment figures, accelerating wage growth, and the sluggish pace at which inflation drops towards the Bank’s 2 per cent inflation target.

Mark Gregory, chief economist for EY, comments: ‘The reality is that the UK’s economic performance is likely to be stable but sluggish.

 ‘But this overall picture of stability masks significant differences in performance across the UK economy. As the media has reported, the retail and consumer-facing sectors have found the going very difficult in recent months. Although retailers often blame the weather when their performance dips, this is not a short-term, weather-related issue.

‘The sector variations highlight the impact that differences in the strength of the UK domestic economy and the global economy have on businesses. FTSE SmallCap companies recorded their highest number of profit warnings since the financial crisis – a clear result of a challenging domestic economy.

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The forecaster suggests the high levels of inflation in 2017 are mainly a result of the fall in the value of Sterling after the EU referendum, but that a sharp increase in oil prices and an average 11.5 per cent increase in domestic energy bills have also had an impact. The group now believes, however, that these factors are having less of an impact now.

 Mr Gregory adds: ‘The squeeze on consumer spending has already impacted businesses and challenges remain. EY ITEM Club expects that the pressure on consumers will ease slightly as inflation slows and wage rises tick up as labour market conditions tighten.

‘However, the changes to welfare benefits and the expected increase in interest rates will limit the upside. The net effect is a forecast for gradual improvement in consumer spending growth from 1.2 per cent in 2018 to 1.6 per cent in 2018 and 1.9 per cent in 2020.’

Throughout the report, the group makes it clear that many of the figures and predictions are highly speculative, principally due to uncertainty caused by ongoing Brexit negotiations.

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