Is it likely that the Bank of England will raise interest rates before 2019?
Derek Halpenny, European head of global markets research at MUFG, says YES.
The performance of the UK economy is reason enough to at least undo the emergency rate cut that was implemented immediately following the Brexit vote. Putting that aside, fears of runaway inflation are overblown. An improved outlook for household consumption will encourage the Bank of England to follow through with its own assumptions: a 0.25-point rate hike in 2018.
The one-off devaluation of the pound is also lifting business confidence with export orders at highs not seen since the 1970s. Renewed GBP depreciation now would not have the same benefits. FX stability at current weaker levels will be more beneficial, and we expect the Bank of England will be content to act, with GBP stability in mind.
Finally, as we advance into 2018, a two-three year Brexit transition deal will look more inevitable, greatly diminishing the cliff edge risks surrounding March 2019. The stone pillars at Threadneedle Street have been the domain of doves in recent months. But we believe the hawks will come home to roost before 2019.
Andrew Goodwin, lead UK economist at Oxford Economics, says NO.
If the MPC is true to its previous guidance, there is little chance of a rate hike before 2019. In recent months Committee members have laid out a range of criteria that would need to be fulfilled in order to justify a rate rise, including stronger growth, evidence of firmer wage and unit cost pressures, and a positive reaction from businesses to Brexit negotiations.
Given the current outlook, this sets the bar pretty high. Though the squeeze on living standards should start to ease next year as inflation slows, growth is likely to remain subdued until austerity is completed. There is no evidence of any acceleration in wage pressures. And with Brexit negotiations having reached an impasse, the risk of a “cliff edge” scenario will be in play for some time yet, encouraging the MPC to take a cautious approach.
On balance, it is hard to envisage the MPC’s criteria being met until the second half of 2019 at the earliest.