UK: rising rate risks - ING

James Knightley, Senior Economist, at ING explained that BoE Governor Mark Carney’s hawkish switch heightens the risk of an August interest rate rise.

Key Quotes:

"Last week, Bank of England Governor Mark Carney stated that “now is not yet the time” to raise interest rates, but something has clearly made him have a change of heart. Earlier today he suggested “some removal of monetary stimulus is likely to become necessary if the trade-off facing the MPC continues to lessen and the policy decision accordingly becomes more conventional”. 

He will now be focusing on three factors that will determine whether he does actually vote for an interest rate rise:

“the extent to which weaker consumption growth is offset by other components of demand including business investment, whether wages and unit labour costs begin to firm, and more generally, how the economy reacts to both tighter financial conditions and the reality of Brexit negotiations.”

This suggests that a rate hike is not a done deal and remains data contingent, but the fact he has clearly moved in the direction of a bias to tighten suggests that the August MPC meeting is in play for a rate rise. 

It also follows on from last week's comments from BoE Chief Economist Andy Haldane that “the balance of risks associated with tightening “too early”, on the one hand, and “too late”, on the other, has swung materially towards the latter in the past six to nine months”. He added that “I think such a tightening is likely to be needed well ahead of current market expectations” and that it would be “prudent moving in the second half of the year”.

While the main hawk at the Bank of England, Kristen Forbes, is leaving the MPC on Friday the BoE in aggregate seems to be coalescing around the idea of removing the emergency stimulus it brought in in the wake of the Brexit referendum outcome. This was the clear message after the Financial Policy Committee’s decision to increase capital buffers at commercial banks on Tuesday. However, any further moves in rates will be data dependent and given the weak consumer spending environment, uncertainty about investment intentions and declines In confidence now that Brexit discussions are underway, this is not guaranteed. If they do choose to raise rates in August we do not believe they will be embarking on a series of hikes."