For more than a decade interest rates in the UK have moved in only one direction — down. But the Bank of England’s Monetary Policy Committee is expected to bring this to an end on Thursday by announcing an increase from 0.25 per cent to 0.5 per cent.
The Bank has made a concerted effort since August to signal to the markets that they should expect a rate rise, so the event itself, if it comes to pass, will not be a surprise.
Instead, attention will focus on the forward guidance and updated forecasts that accompany the announcement. Here are four things to look out for in the MPC’s statements.
Is there any chance the MPC will not raise rates?
This possibility cannot be entirely discounted. Mark Carney, the BoE governor, has been dubbed the “unreliable boyfriend” for having — several times — signalled a rate rise was imminent which then never materialised.
But, following the MPC’s statement in September that a majority of members believed “some withdrawal of monetary stimulus is likely to be appropriate over the coming months”, market expectations of a 0.25 percentage point rate rise at this week’s meeting have risen to 89 per cent.
The committee has done nothing to dissuade this view. If it chooses not to raise rates now, it will be a significant shock to market participants.
“When it comes to monetary policy, talk matters almost as much as action,” said Kallum Pickering, senior UK economist at Berenberg. “Now that the market is ready and waiting for a hike this week, the BoE would risk a major hit to its credibility if it did not meet this expectation.”
“One and done”?
Just as last week when the European Central Bank outlined the future of its economic stimulus programme, most of the attention will focus on the signals the BoE sends about what happens next.
Markets have priced in just three 0.25 percentage point rises over the next two years, including one this week. This would be a slow pace of rate rises compared to previous tightening cycles.
The MPC is almost certain to repeat this week that any future rate rises will be “at a gradual pace and to a limited extent”, but it is likely to want to go further in providing guidance. One approach they have used in the past is to indicate whether or not current market expectations are consistent with the committee’s thinking.
The minutes of the MPC’s meeting will also reveal what discussion there was of the arguments for and against raising rates further.
The doves will point out that the current rate of inflation — 3 per cent in September — is driven almost entirely by the Brexit-induced depreciation of sterling.
There is little sign of any significant upward pressure on wages, and economic growth has declined since last year. The BoE’s forecast assumes a smooth Brexit but there is still uncertainty about whether this will be the eventual outcome.
The hawks will stress that growth in the third quarter was a bit better than expected, unemployment remains historically low and continued rapid credit growth — even as real incomes have fallen — suggests low interest rates are buoying consumer spending. Though the BoE’s forecast for economic growth is low by historic standards, it is in line with their assessment of the UK’s long-run growth potential post-Brexit.
“Weak productivity growth — and therefore trend output — points to the need to raise interest rates at far lower rates of GDP and average wage growth . . . than has been the case in the past,” said George Buckley of Nomura.
How is the vote split?
The split of opinion on the MPC could provide an indication of how much appetite there will be for further rate rises.
Although the precise views of many of the MPC members are unknown, it is widely expected that at least six of the nine members will vote to raise interest rates this week.
Ian McCafferty and Michael Saunders have already voted for a rate rise at earlier meetings. Mr Carney, Andy Haldane and Gertjan Vlieghe have also given speeches in recent months suggesting they are also minded to raise rates.
Silvana Tenreyro said last month that her decision would be data driven. The two most dovish members of the committee appear to be deputy governors Dave Ramsden and Jon Cunliffe, while fellow deputy governor Ben Broadbent has been playing his cards very close to his chest.
How does the BoE change its forecasts for growth and inflation?
Both inflation and growth were a little higher in the third quarter than the bank forecast in August, meaning a near-term upgrade to the forecasts is likely. But it is the forecasts two and three years ahead that are more important.
Sterling has appreciated since August, which will tend to reduce the bank’s forecast for inflation in three years’ time, bringing it closer to the 2 per cent target.
Markets are also pricing in a more rapid rise in interest rates than they were in August. Taking this into account will dampen forecasts for economic growth.
“The BoE’s inflation and GDP forecasts will also be worth watching at this meeting,” said Kathleen Brook of City Index. “Sharply falling inflation alongside weak growth expectations for the next 12 months could boost market expectations that this hike really is an isolated move.”