BoE widely expected to raise interest rates – BBH

Analysts at BBH suggest that the Bank of England is widely expected to raise interest rates and a rate hike would put to rest the knock on Governor Carney of not delivering on a single rate hike despite his numerous threats.  

Key Quotes

“The reason that the BOE would raise rates is that inflation is projected to be above target for some time and the economy, while slowing, is near full-employment.  There does not appear to be much spare capacity.”

“On the other hand, the reason why some would dissent for a rate hike (by perhaps one or both Deputy Governors) is that inflation is largely an echo from the past depreciation of sterling.  It will soon drop out of the year-over-year measures.  If the economy is already slowing, and household discretionary spending is being squeezed by inflation and miserly wage increase, a pro-cyclical monetary policy does not seem the best way to extend the expansion.  Remember too, higher rates pass through to the households relatively quickly due to the widespread practice of floating rate mortgages.”  

“A compromise may be a dovish hike, where Governor Carney makes clear his reservations and signals that this is not the beginning of a tightening cycle.  He may emphasize the risks also speak to a cautious approach.  Still, being able to engineer a dovish hike partly depends on luck and existing conditions.  The best way to ensure a drop in sterling is not to hike rates, though a signal that a hike may still be delivered next month would likely limit the losses after the knee-jerk surprise.”