Recent hawkish noises from Bank of England governor Mark Carney may have been intended primarily to boost sterling and fight inflation, rather than signalling an imminent hiking cycle, according to ratings agency S&P Global Ratings.
In recent weeks the Bank has surprised some economists by making a clear move towards raising interest rates this year, despite relatively weak economic data.
That change in rhetoric caused the pound to surge to its highest levels since the sharp fall following the EU referendum result in June 2016.
In a report published today, Paul Watters, primary credit analyst at S&P, said: “We believe the Bank and Mark Carney's recent statements are primarily aimed at propping up sterling to reduce imported inflation pressures.”
Inflation surged to 2.9 per cent annually in the year to August as the weaker pound has made imported products more expensive, raising pressure for the Bank to raise interest rates. However, that rise in inflation has led to a squeeze on consumers as wages have lagged behind, concerning some economists that a rate hike could harm growth.
“We remain a bit skeptical as to how justified such a hike would be in the near term,” Watters wrote.
The Bank may act to raise interest rates at its next meeting at the start of November, he added. That would reverse the post-Brexit vote stimulus cut, but any further upward moves “do not appear warranted on the back of a slowing economy”, Watters said.
Watters also noted the risk of a “disruptive Brexit” remains high, although the risk is no longer increasing in S&P’s view thanks to the “more conciliatory tone” adopted by Prime Minister Theresa May towards the EU since her set-piece speech in Florence.
“Although a disruptive Brexit is not our base case scenario, the tangible lack of progress in phase one of the Brexit negotiations over the past three months amid infighting within the UK political establishment, including the government, means that this risk remains high.”