An unprecedented era of easy money, seen on both sides of the Atlantic since 2008, could be over by the end of the year, with the Federal Reserve preparing to hike rates and some analysts expecting the UK to follow suit in subsequent months.
“If the economy evolves as we expect, economic conditions likely would make it appropriate at some point this year to raise the federal funds rate target,” Fed chair Janet Yellen told Congress yesterday.
She is widely expected to push for a rate rise in nine weeks’ time.
A rate hike in the UK is not thought to be so close, yet analysts are now discussing the possibility that the Bank of England could make a move in November.
Pay packets in Britain are finally getting fatter, lifting the possibility of tighter monetary policy. Figures published yesterday revealed pay climbing at its fastest rate since 2010. Wages were 3.2 per cent higher in the three months to May than they were in the same period last year, the Office for National Statistics said.
Earlier this week Bank boss Mark Carney told a group of MPs: “The point at which interest rates may begin to rise is moving closer.”
Analysts at Unicredit and Danske Bank are betting a rate hike will come in November. Others are considering bringing forward their forecasts, which until recently pointed towards the second quarter of 2016.
“Our base case house view remains that the first…rate hike will come in February 2016, but November 2015 is on the table as a possibility,” said analyst Simon Peck from RBS.
Chris Hare from Investec added: “Markets now look to be pricing in a rate hike around February/March. In fact the rate hike expectation has been brought in over the last day or so – it was April previously.”
David Miles, a colleague of Mark Carney’s on the Bank’s monetary policy committee, also said this week that it would be “a bad mistake” to keep waiting before raising rates.
The move to tighter policy in the UK and US is in contrast with the situation in Canada, however. The Bank of Canada cut its benchmark interest rate for the second time this year, yesterday, sending the Canadian dollar fell to a six-year low.