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Stronger economy will prompt BoE summer rate hike
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Loading...The outlook is brighter. Bloomberg Economics now sees the U.K. economy growing faster in 2018 and the labor market maintaining its air of invincibility. The Bank of England’s Monetary Policy Committee is likely to respond by lifting interest rates in August.
Why?
GDP Growth Surprise
The latest batch of GDP data surprised most economists. The economy grew by 0.5% in the final quarter of 2017, 0.1 percentage point higher than BE forecast and the consensus. A couple of factors probably contributed to this unexpected vibrancy. First, the buoyancy of the global economy is lifting the U.K. with it. Second, consumers are feeling a little more chipper because, on a quarterly basis, their wages are no longer falling in real terms.
Both those themes will continue to support the economy this year, which should mean quarterly growth is a little faster than BE had expected previously. The forecast for annual growth in 2018 has been raised to 1.7% from 1.4%.
Labor Market Remains Bulletproof
BE had expected the labor market to start softening in late 2017 because of the slowdown in growth in the first half of the year. In all likelihood, an economy struggling to reach full employment over 2018 would have been enough to keep the MPC on hold until after the sun had set on the Brexit negotiations. But the evolution of the job statistics suggest that the soft spell has been milder than BE expected. Slower demand growth has only been enough to halt the decline in the unemployment rate, not change its direction.
What’s more, with the employment surveys continuing to point to solid hiring and demand growth likely to be a little stronger going forward, the unemployment rate looks set to reassert its downward trend in 2018. By the end of the year, the remaining spare capacity in the economy is likely to have been completely absorbed. That should help pay growth maintain the momentum it has gathered recently.
Rates Likely to Increase Faster
Against the backdrop of faster economic growth and a labor market on the cusp of full employment, the MPC now looks likely to lift rates again this year. BE expects policy makers to vote in favor of a rate hike in August, though a move in May can’t be ruled out. BE forecasts just one 25 bps rise this year with the MPC stepping out of the limelight in the final six months of Brexit talks from October to March 2019.
The next hike is then assumed to come in May 2019, nine months after the August hike and 18 months after the interest rate cycle turned in November 2017.
Source: Bloomberg Pro Terminal
Jr Trader Alexander Kumanov
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