Bank Of England

Super Thursday was not that super, but higher interest rates are coming sooner than we thought.

 

One Thursday every three months is super – at least it is if you take an economics perspective of the world. It is the day when the Bank of England’s monetary policy committee (MPC) meets, cogitates, decides on the level of interest rates, AND releases the minutes of the meeting, WHILE, on the same day the Bank of England Inflation Report is released.

The MPC voted to do nothing – unanimously. But the minutes stated that monetary policy “would need to be tightened somewhat earlier and by a somewhat greater extent.”

The Inflation Report saw an upping in the bank’s forecast for the economy – but not by much. It had expected the economy to grow by 1.6 per cent this year, and 1.7 per cent next year and the year after. It now thinks growth of 1.8 per cent is more likely in all years.

Given the speed with which the euro area and US are growing – between two and three per cent, with the latest surveys pointing at four per cent annualized in January – projections for the UK economy are not that inspiring.

The report also projects inflation at 2.2 per cent in two year’s time, based on market expectations of interest rates, implying that the markets are underestimating how high rates will rise over the next two years.

Paul Hollingsworth, Senior UK Economist at Capital Economics said: “Our view is that today’s releases pave the way for an interest rate hike in May. And we are sticking to our view (made in September last year) that the MPC will hike interest rates three times in total this year, taking the Bank Rate to 1.25 per cent by the end of this year. We envisage two further hikes in 2018, leaving interest rates at 1.75 per cent.”

Samuel Tombs at Pantheon Macroeconomics said: “All told, then, the MPC has signalled to markets that a May rate hike is under active consideration, but is far from guaranteed. With the economy still lacking real momentum, Brexit talks likely to progress slowly and the housing market showing significant signs of stress, we still think that the MPC will hold back until August.”