Governor Mark Carney’s recent speech at the International Monetary Fund maintained the view that the Bank of England (BoE) is paving the way for a hike in interest rates sooner rather than later, with a move in November now a very real possibility. Carney has again warned that slack in the UK economy is diminishing and that this reduces the UK’s tolerance of above-target inflation. The short-term impact of Brexit is also likely to be inflationary.
Even if the BoE does hike interest rates from 0.25% to 0.50% sooner rather than later, it’s highly likely that it will tread very carefully on further increases. Indeed, given that interest rates have not risen since 2007, the Monetary Policy Committee (MPC) may well sit tight for an extended period after an initial hike to see how consumers and businesses respond.
EY’s ITEM Club also believes that the case for further BoE action after any initial hike will be limited by persistent slow UK growth, a steady easing back in consumer price inflation after a probable peak just above 3% in late-2017 (as the impact of Sterling’s past sharp drop fades) and Brexit uncertainties.
There’s also a strong feeling that pay growth will firm up only gradually over the coming months.
Howard Archer, chief economic advisor to the EY ITEM Club, commented: “In his speech, Mark Carney highlighted diminishing slack in the UK economy and observed that this reduces the BoE’s tolerance of above-target inflation. A new factor that Carney introduced in his speech was that the case for a modest monetary tightening is reinforced by the possibility that global r* (ie equilibrium interest rate) may be rising, in turn meaning that monetary policy has to move in order to stand still.”