Bank of England Outlook: Higher Interest Rates Incoming February 2022
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The signals coming out of the Bank of England are leaving little room for doubt that interest rate hikes will be coming sooner rather than later.
Pound sterling is responding to the shift in benchmark expectations as it should, strengthening against the US dollar.
BoE Monetary Policy Committee Micheal Saunders said on Saturday that the market was right to price in an early rate hike. UK interest rates are currently at 0.1%.
That came hot on the footsteps of Governor Andrew Bailey urging policymakers to take action to avoid “very damaging” inflation, which is even more striking as just a few weeks ago Bailey and the majority of his colleagues on the MPC were seeking there was no need for hasty action.
Those remarks were bolstered in no uncertain term by comments o the likely longevity of inflation from the new chief economist at the BoE, Huw Pill.
“In my view, that balance of risks is currently shifting towards great concerns about the inflation outlook, as the current strength of inflation looks set to prove more long-lasting than originally anticipated.”
Expect UK interest rate rise “significantly earlier”
All this is setting the ground for the possibility of a rate rise as soon as November or December’s meeting.
GBP/USD was trading at 1.3549 last Wednesday (6 October), the pound is now priced at 1.3620 against the dollar.
Saunders is on the hawkish wing of the MPC. He was in favour of raising rates back in 2017 and 2018.
Although Saunders couched his comment to the Telegraph newspaper in such a way as not to indicate any exact timing for a rate rise, he nevertheless said, “it is appropriate that the markets have moved to pricing a significantly earlier path of tightening than they did previously”.
Peter Schaffrik, global macro strategist at RBC sees Saunders as something of an outlier, putting more significance on the comments by Bailey: “Saunders is not quite representative of the entire MPC as he tends to be the most extreme. Bailey’s comments are important as he seems to embrace tightening as well.”
Deputy Governors Ben Broadbent and David Ramsden are also thought to be biased towards hawkish of tightening, with Bailey’s recent interview to the Yorkshire Post newspaper placing him on that end of the spectrum too.
External members of the MPC Jonathan Haskel, Silvana Tenreyro and Catherine Mann are thought to be on the dovish side of the MPC. The committee has nine members.
Analysts and traders: benchmark to rise 0.25% by February
Liz Martins, a senior economist at HSBC Holdings, told Bloomberg she expects to see a move higher for rate in February, with Saunders urging the MPC to move before then. She said, “[he] will vote for a rise in December or even November, and he may not be the only one.”
Adding to the hawkish interpretation of Bailey’s evolving stance, the governor Bailey told the UK regional newspaper that he doesn’t think it is likely that there will be further increases in unemployment in the wake of the government’s ending of the furlough scheme in September.
In common with the US Federal Reserve, the Bank of England factors in labour market conditions in its decision-making on the timing of interest rate lift-off and the start of the tapering of asset purchases. anticipate a further increase in unemployment after the government ended its furlough program last month.
The BoE reckons unemployment will top out at 4.75% in Q3.
Money markets movements have recently priced in a 25 basis points rise in rates by February, with another 25bp by the end of the second quarter.
Danger of 6% inflation in 2022 is concentrating minds
The UK central bank expects inflation to be in excess of 4% by the fourth quarter, way above its target of 25. Worse still, the market breakeven inflation expectations are running at 6% for next year.
With energy and food prices on the rise and supply disruption showing no signs of improvement as ports around the world are hit by worsening delays and warehouses continue to have difficulties getting goods out to retailers because of truck driver shortages, inflation is not looking “transitory” as central bankers had previously hoped.
Against this background some traders believe rates could easily touch 0.75% by H2 2022.
Bank of England outlook: Q1 rates lift-off likely
Raising rates when the economy has not fully recovered to where it was before the pandemic holds out the prospect of heightening fears about stagflation – the rate rises might not be enough to forestall inflation but are enough to weaken growth prospects and shocking financial markets that have grown used to a steady diet of cheap money.
