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UK Economy on Track for Bank Rate Hike

UK Economy on Track for Bank Rate Hike
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October 26, 2017 By: , No Comments

British Prime Minister Theresa May remains confident that a Brexit deal will be passed before the United Kingdom is scheduled to leave the European Union. This opinion is contrary to the expectations of Brexit Minister, David Davis. On Wednesday, 18 October, Secretary Davis addressed a Brexit committee, indicating that no vote would be possible until the UK left the EU in March 2019. Prime Minister May took an opposing view and indicated that she remains confident that Britain will be able to strike a deal with the EU well ahead of schedule, allowing Parliament to vote on a final deal. The GBP/USD pair has ticked up in recent days, and is currently trading at 1.33 – its highest level in 5 days.

From an economic perspective, the UK economy continues to perform above expectations. From slow growth in July, August and September, the UK economy has slowly started turning the corner. GDP growth in the UK remains below European growth forecasts. From July through September, the UK economy grew by 0.4%, up 0.1% from Q2 2017. Naturally, the news encouraged sterling traders who went long on the cable. Equally important is the bullish perspective on UK 5-year government bonds which are now trading at their highest level since the June 23, 2016 Brexit referendum. All of this bodes well for a move to raise the bank rate when the BOE MPC meets to discuss monetary policy.

 

Negative Perceptions of the UK Economy Abound

Despite doomsday forecasts, the UK economy has performed above expectations in the wake of the Brexit vote. Many analysts and economists were expecting the bottom to fall out from the UK economy, but this has simply not happened. For 2016, the UK was one of the best performing economies. However, that optimism dried up in 2017 as the economy posted the worst performance since 2012. Part of the reason the UK economy is struggling at this juncture is rapidly rising inflation brought on by a weak GBP. This results in higher import costs for a wide range of goods and services. While export figures have improved, the exodus of major corporations from the UK is slowly impacting unemployment numbers.

The GDP growth is an encouraging sign for the UK, and it certainly strengthens the Chancellor of the Exchequer’s hand when the budget speech is to be delivered. The jury is out as to when the Bank of England will pull the trigger on interest rates. Leading analysts from UniCredit believe that a big decision will be made on Friday, November 2 by BOE governor Mark Carney. If the bank rate is hiked, the UK interest rate will rise by 25-basis points from 0.25% to 0.50%. While significant, it still represents one of the lowest interest rates in the history of the United Kingdom. Nonetheless, the GBP will take its cue from hawkish sentiment. A poll conducted by Reuters on Tuesday, 24 October indicates that the 25-basis point rate hike is likely on Friday, 2 November, and financial markets have allocated a 90% probability to such a move.

 

Higher Interest Rates in the Offing

Positive sentiment has been boosted by the Office for National Statistics (ONS) which undershot growth expectations for the current quarter at 0.3%, instead of the 0.4% that was recorded. Rising consumer demand has helped boost UK GDP growth during this volatile time. The biggest challenge for the UK economy remains the Brexit saga. However, to reverse negative bias the UK needs to increase productivity by boosting exports. Many high-growth enterprises in the United Kingdom are running low on finance, and the budget speech in November is certainly going to address that issue. The flipside of the coin is that higher interest rates will increase the debt burden currently on UK households. Any moves to raise interest rates will cut both ways. It may not be a gamble the BOE is willing to take.

Do you believe that the Bank of England Monetary Policy Committee should vote to raise interest rates on 2 November 2017? What effect will higher interest rates have on your personal financial situation?

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Brett Chatz

About Brett Chatz

Brett Chatz is a graduate of the University of South Africa, and holds a Bachelor of Commerce degree, with Economics and Strategic management as his major subjects. Nowadays Brett contributes from his vast expertise in online trading for spreadbettingreview.co.uk.

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