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Economists forecast earlier than expected Bank of England rate hikes

Paloma Kubiak
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Paloma Kubiak

The Bank of England is to lay out its latest forecast for interest rates this Thursday with the conclusion of February’s Monetary Policy Committee (MPC) meeting – and some economists predict the next rate rise could come faster than expected.

In the first inflation report since the Bank’s Base Rate was raised to 0.5% in November, the MPC is to give an updated outlook on the economy, interest rates and inflation – alongside the minutes from the latest rate-setting meeting.

Inflation is currently running at 3% – well above the MPC’s 2% target, and economic growth for the final three months of 2017 is estimated at 0.5%, from 0.4% in the third quarter of 2017.

Some economists believe the combination of high inflation and solid economic growth could prompt the MPC to soon raise rates in 2018.

Paul Hollingsworth of Capital Economics, said: “In order to bring inflation back to target within its forecast horizon, there would need to be more tightening than currently implied by markets (even taking into account the rise in market expectations since November’s Inflation Report).

“And if the MPC wanted to shorten the horizon over which it brought inflation down, to two years, then that tightening would need to come sooner as well.”

The BoE has already said it expects to increase rates by 0.25% twice in the next two years.

However, Hollingsworth estimates rates would need to rise three or four times over the next two years to bring inflation to 2% and predicts that the base rate will finish 2018 at 1.25% and 2019 at 1.75%.

No need to rush?

Samuel Tombs, chief economist at Pantheon Macroeconomics, said the surprise growth in the economy is set to bring forward the next rate rise – but believes that Brexit negotiations and uncertainty could still keep hikes on hold.

He said: “The MPC still needn’t rush to tighten again, but the economy’s unexpected momentum means that we have pulled forward our forecast for the next rate rise to August, from November.

“We then see two further rate increases coming in February and August 2019, provided that the direction of travel in talks with the EU remains towards a soft Brexit.”

Andrew Goodwin, lead UK economist at Oxford Economics believes that inflation is set to drop slower than the MPC predicts and evidence that the housing market is sensitive to rate hikes will mean the Bank moves slowly. 

He said: “On balance we see the MPC pressing ahead with its desire to normalise policy but, with inflation slowing more rapidly than they anticipate, they will move in baby steps with only one rate hike – probably in May – coming in 2018.”