Bank of England interest rate decision preview

Bank
of England Governor Mark Carney.
Anthony Devlin/Getty Images; Samantha Lee/Business
Insider

• The Bank of England is set to hike interest rates for
  just the second time since the financial crisis later on
  Thursday.
• Britain’s central bank is expected to raise rates from
  0.5% to 0.75%, taking the UK’s base rate of interest to its
  highest level since March 2009.
• Markets are pricing a more than 90% chance of a hike
  but
  UBS strategist John Wraith says a hike on
  Thursday is an “unnecessary risk.”

LONDON — At lunchtime today, the Bank of
England looks set to raise interest rates
for just the second time since the financial crisis.

If financial market expectations are met, Britain’s central bank
should raise rates from 0.5% to 0.75%, taking the UK’s base rate
of interest to its highest level since March 2009. Markets are
pricing a more than 90% chance of a hike, according to the latest
data.

The rate hike is set to be one of the most divisive decisions in
recent bank history, with opinions split on whether or not
increasing borrowing costs will be a good idea going forward.

Governor Mark Carney and the other eight members of the bank’s
rate setting Monetary Policy Committee have been signalling that
a hike is likely to come at some point in 2018 since their last
hike in November last year, and Thursday looks like the day it
will happen.

Many had expected a hike in May, but weaker than expected data
stopped the committee from doing so. Now, however, the time — if
not perfect — is right to raise rates.

“There is only a very remote possibility that the BOE won’t hike
rates on Thursday,” Kathleen Brooks, research director at Capital
Index said in an email.

Carney and his team’s problem is that markets are now so
convinced that a rate hike is coming, that the committee’s
credibility would be under threat if it were to leave rates on
hold. Throughout his tenure as governor, Carney has faced
accusations of being a so-called “unreliable boyfriend,”
frequently promising rate hikes and then ultimately failing to
deliver.

The accusation was levelled at Carney after May’s policy
meeting, which many had expected would see a rate hike.

“Not for the first time, Mark Carney’s policy of guiding the
markets as to what to expect has backfired,” Ben Brettell, a
senior economist at FTSE 100-listed investment manager Hargreaves
Lansdown said at the time.

The u-turn in May and the lack of attempt from the MPC to try and
dampen financial market expectations of a hike point in one
direction, John Wraith, strategist at UBS wrote in a note on
Monday.

“Guidance and communication from the MPC over recent months, and
in particular the lack of any attempt to rein in the ever higher
market-implied probability of a 25bp hike, suggests a majority of
members are set to vote for a hike on Thursday,” he said.

But Wraith is one of a handful of analysts who sees the bank’s
likely hike as premature. He called it an “unnecessary risk” in a
note sent to clients this week.

“We continue to view even the tentative tightening embarked on
since late 2017 as an unnecessary risk, and see several reasons
why a hike is not justified at this point in time,” he added.

Uninspiring data

The British economy could be summed up as average. Growth is
hovering at around 0.3% per quarter,
inflation is just above 2%, and
real wage growth is just about climbing.
The number of people in jobs is at a record high.

On the downside,
consumer and business confidence are falling, largely due to
continued uncertainty about what Brexit is actually going to look
like.

“Despite ongoing healthy job creation and the very low level of
unemployment, confidence among consumers has been softening of
late, particularly in their forward-looking assessment of the
economic outlook,” Wraith said. “Corporate confidence too looks
weak, and is being reflected in ongoing very soft business
investment.”

“The latest edition of the Ipsos Mori Issues Index provides
striking evidence that concerns about Brexit are the reason that
consumer confidence is ailing,” he continued.

“The proportion of respondents viewing the EU and Brexit as one
of the most important concerns facing the UK shot up from 46% to
58% in July, the highest reading in the history of the index
which dates back to 1974.”

Wraith doesn’t believe that such data will stop the Bank of
England from hiking rates but believes it should, particularly
when considering that this behaviour is going against the bank’s
own forecasts.

“It has long been the MPC’s explicit assumption that ‘households
and companies (will) base their decisions on the expectation of a
smooth adjustment to new trading arrangements’,” he said.

“Subsiding consumer and business confidence, especially in
forward looking gauges, together with the responses to the Ipsos
Mori opinion poll, suggest strongly in our view that private
sector economic agents are increasingly and demonstrably not
behaving in this way,” Wraith concluded.

What to look out for

The outside of the Bank of England
Jim Edwards

Given that a rate hike is almost a foregone conclusion, other
parts of the MPC’s decisions, and the minutes of the meeting are
likely to provide more intrigue.

Kathleen Brooks said that one of the main things to look for will
be the “mechanics of the rate decision,” particularly with regard
to how the vote goes in terms of who votes for what.

“The market is currently expecting an 8-1 split in favour of a
hike, with Sir Jon Cunliffe the only member expected to dissent
and vote against a hike,” she wrote.

“However, if we get more MPC members voting against a hike then
sterling could come under pressure, as it would suggest a future
dovish stance by the BOE.”

Mark Carney’s press conference will also be of interest,
particularly if the governor provides an update on the
equilibrium rate of UK interest rates.

Here’s Brooks one last time: “Earlier this year the BOE Governor
Mark Carney said that the Bank would give its view on the latest
equilibrium, or neutral, interest rate for the UK economy.

“This is also known as R*. The market is expecting this rate to
come in around 1.5%. If an R* of 1.5% is confirmed by the BOE,
then it would suggest another three rate hikes are likely in the
next 3 years.”

Stay tuned to Business Insider for updates after the decision is
announced at 12.00 p.m. BST (7.00 a.m. ET).