The Bank of England is expected to report today that in light of the UK economy growing faster than anticipated in the run up to Brexit, another interest rate rise could be on its way this year.
The Bank raised rates for the first time in more than a decade in November, reversing a cut made in 2016 as the country felt the impact of the EU Leave vote – rates then were cut 0.5%.
While the UK still faces numerous economic challenges, it has fared better than most forecasts made at the time of the Brexit vote, and it ended 2017 stronger than the central bank expected.
The BoE the is widely expected to keep rates on hold today as it weighs up the impact of November’s rate rise on the economy.
Investors will be keen to see if any of the nine rate-setters at the MPC meeting vote for a hike. That would be a sign that a rate increase in May would be more likely, May is when the BoE is due to update its economic forecasts.
Two rate rises?
According to Reuters, investors see a 50-50 chance of a new hike in May and some economists are predicting two increases this year alone. That would represent a big change from the BoE’s signal as recently as November of just two hikes over the next three years.
Of course, any rise in interest rates will depend on UK economic growth and while it may have surprised the BoE on the upside, it is in a very fragile position with Brexit looming.
Much will depend on the UK’s attempt to negotiate a new trade deal with the EU, its main trading partner.
As UBS fixed income strategist John Wraith told Reuters: “Although the MPC won’t explicitly say so given political sensitivities, we expect their decision in May to be almost entirely determined by whether or not a transitional deal has been fully agreed and signed by then”.