BoE Hints At 'earlier' Rate Hikes As MPC Adopts More Hawkish Stance
The Bank of England (BoE) has held interest rates at 0.5% but adopted a more hawkish stance by suggesting a rate hike would be needed "somewhat earlier" and to a "somewhat greater extent" than anticipated.
The Monetary Policy Committee (MPC), which voted unanimously to maintain rates in the February meeting, said an interest rate rise would be needed "somewhat earlier" in order to return inflation to its 2% target.
The MPC forecasted CPI, which is currently at 3%, to remain above its target despite predicting a fall back over the coming months.
The MPC said: "The committee judges that, were the economy to evolve broadly in line with the February Inflation Report projections, monetary policy would need to be tightened somewhat earlier and by a somewhat greater extent over the forecast period than anticipated at the time of the November report, in order to return inflation sustainably to the target."
Speaking at the Inflation Conference shortly after the announcements, Carney reiterated: "In order to return inflation back to target, it will be necessary to raise rates, to a limited degree, somewhat earlier and to a greater extent than previously thought due to a stronger world economy and greater excess demand."
Furthermore, the BoE upgraded its GDP forecasts - it said it expected the UK economy to expand by 1.8%, up from the 1.6% predicted in last November, pointing to the strength of the global economy and net UK trade contributing "substantially".
Sterling spiked 0.8% to $1.399 and 0.3% to €1.345 against the euro after the announcement, while the FTSE 100 is down almost 1% to 7,210 points.
In November 2017, the MPC hiked rates for the first time in over a decade, reversing the decision made in August 2016 to cut rates following the UK's vote to leave the EU.
It forecasted at the time there would be two more rate rises of 0.25% over the next three years however, it seems hikes could come faster than the market originally anticipated.
Leading economists last week said the BoE will raise rates faster than market expectations, predicting two hikes this year on the back of a stronger UK economy.
Markets are now pricing in a 67% chance of a rate hike in May, up 17% from prior to the MPC's decision.
Brexit
The MPC said Brexit remained the biggest risk and greatest source of uncertainty to the outlook of the UK economy.
It said: "The MPC's projections are conditioned on the average of a range of possible outcomes for the UK's eventual trading relationship with the European Union.
"The projections also assume that, in the interim, households and companies base their decisions on the expectation of a smooth adjustment to that new trading relationship.
"Developments regarding the UK's withdrawal from the European Union - and in particular the reaction of households, businesses and asset prices to them - remain the most significant influence on, and source of uncertainty about, the economic outlook."
Carney added: "This is a crucial year for the Brexit negotiations. We will all be better informed this time next year about the future trading relationship with the EU and that will have an effect on...the outlook for the economy and therefore the policy of the MPC."
Reaction
Ben Brettell, senior Economist at Hargreaves Lansdown, said: "The BoE's rhetoric echoed that of September's meeting minutes, which preceded the November rate hike.
"It now looks like the next rise could happen as soon as May - the next time the BoE's economic forecasts are due to be updated."
Ian Kernohan, economist at Royal London Asset Management, said: "The latest inflation report significantly raises the risk of a rate hike in May. Assuming there is no major economic shock, the MPC has judged that monetary policy needs to be tightened somewhat earlier, and somewhat more, than anticipated in November.
"Although the rate of GDP growth remains modest, the BoE believes that trend growth has fallen.
"Inflation is still expected to fall back gradually, however the MPC notes some firmness in wage growth and expects that pay growth will rise further in response to a tighter labour market."
Richard Carter, head of fixed interest research at Quilter Cheviot, said: "The MPC did sound an optimistic note on the outlook by revising growth forecasts up and putting the markets on notice that rates may need to rise earlier than expected.
"This suggests that they are considering a hike in May and that surprise has boosted both sterling and gilt yields.
"Going forward, we continue to expect Brexit and the associated political uncertainty to weigh on both the UK economy and UK assets, meaning that interest rates will be adjusted very gradually."
Chris White, head of UK equities at Premier Asset Management, said: "It is clear that we have entered a new economic phase.
"We are finally out of the post credit-crunch intensive care phase and we are now seeing meaningful recovery in the UK and around the world and this is likely to mean higher inflation, higher interest rates and higher bond yields."
Silvia Dall'Angelo, senior economist at Hermes Investment Management, said: "Ongoing strength in global demand and a possible uptick in domestic wage inflation might offer the BoE an opportunity window to hike rates in May.
"However, a few things can go wrong between now and then.
"Most importantly, the uncertainty surrounding the evolution of the Brexit process has increased if anything: the prospect of a transition deal by mid-March does not look like a certainty any longer and there is still no clarity on the final terms of the arrangement that will regulate the relationship with the EU."
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