When will the Bank of England start raising interest rates?

The pound has found gains relatively hard to come by so far this week, a development that we think is a rather surprising one given the recent hawkish stance adopted by Bank of England policymakers.

The Bank of England has, for a number of months now, been among one of the more hawkish central banks in the G10. Governor Andrew Bailey warned investors earlier this month that a rate increase before the end of the year could be on the cards. He stepped up this hawkish rhetoric over the weekend, saying that he was concerned about rising inflationary pressures and that the MPC would have a difficult job on its hands in reigning in rising consumer price growth. In what appeared to be a bit of a coordinated effort to bring forward expectations for policy tightening, fellow MPC member Michael Saunders also warned households to prepare for a ‘significantly earlier’ hike on Sunday.

We had said prior to the weekend’s communications that an interest rate hike in the first quarter of 2022 was likely, although that there was a very good chance we could see lift-off before the end of the year. We now think that a 15 basis point rate hike is highly likely at either the November or, more realistically, the December MPC meeting. Policymakers are clearly becoming increasingly concerned with rising inflationary pressures in the UK economy. UK inflation is now expected to exceed 4% by the end of the year, although supply bottlenecks, particularly the recent petrol shortages, suggest that prices may rise even more aggressively than the BoE has pencilled in.

Sterling finally managed to eke out gains against the US dollar on Thursday, although we see this as just as much a consequence of a broadly weaker greenback, which has sold-off against most of its major peers in the past 24 hours or so. The key stumbling block to sterling strength appears to be ongoing concerns that the petrol crisis could weigh on UK growth during the remainder of the year. While we think that these concerns are far from being unwarranted, we believe that the prospect of faster-than-expected Bank of England rate hikes should be more than sufficient to create further upside support for the pound in the immediate-term.

With no real macroeconomic data out of the UK during the remainder of the week, we think the pound will continue to be driven largely by expectations for central bank policy both domestically and across the Atlantic.