Bank of England Review

Feb 10, 2018, 02:03
Bank of England Review

It was widely expected to keep rates on hold on Thursday as it weighed up the impact of November's move on the economy.

Economists think the next rate rise could come as soon as May.

The FTSE 100 was 0.94 percent down at 7,210.80 points as of 12:39 GMT on Thursday, 08 February 2018.

In more general terms higher interest rates tend to be negative for equities as an asset class.

Around 8.1 million United Kingdom households have a mortgage, and of those nearly half are on either a standard variable rate or a tracker rate. The Dow Jones fell by over 4% for the second time this week as the hawkish Bank of England reignited concerns about higher interest rates globally.

"We expect the MPC to lift interest rates from 0.50% to 0.75% in May, followed by a further increase to 1.0% in November".

This scenario, however, will leave inflation above 2% in three years, which can be judged to increase interest rates with more than the expectations of investors.

But it now appears there could be a third increase and those rises could be sooner than expected.

"Specifically, the minutes observe that if the economy develops as now expected in the February Inflation Report monetary policy would need to be tightened" Archer said.

EUR/GBP: The case for a short after the hawkish BOE

The bad news is that this growth performance is due, in the Monetary Policy Committee's view, mainly because the global economy is growing more strongly than anticipated rather than because of anything we are doing at home.

The MPC said Brexit remained the biggest risk and greatest source of uncertainty to the outlook of the United Kingdom economy.

As a result, the Bank has raised its growth forecast for the United Kingdom economy to 1.7% this year, from its previous forecast of 1.5% made in November. But that assumes Britain's exit from the European Union is smooth.

Today the Bank signalled that the old conventions of increasing interest rates when inflation is above target would return. Despite last year's rate rise, there are misconceptions as to when consumers will actually see the results, particularly as some banks are failing to pass this on.

But not everything in the garden is rosy. On the uncertainties surrounding Brexit, he said that future forecasting was still possible even with these uncertainties.

We are driving along with the hand brake half on.

On the economy, he said that the committee expected the United Kingdom economy to continue growing, with the unemployment rate slowing, and wages rising. Swap rates, which mortgage lenders use to price their fixed-rate home loans, have already been rising with, for example, the two-year rate more than doubling during the last 18 months.

The Bank of England today upgraded its growth forecast for the British economy next year - but warned borrowers to be braced for interest rate hikes.

That is a long way below Britain's pre-financial crisis average of about 2.9 percent, but the BoE says the economy can now only grow by around 1.5 percent a year without overheating.