UK Rate Hikes: The Market Pricing Differs from BoE Statements

The UK’s interest rate hike was viewed as a one-time move despite the statements of the Bank of England. The British pound fell and investors viewed the quarter-point rise as a dovish development. Going forward, will markets be swayed by hawkish talk from the BoE?

Factors that are depressing the possibility of another rate hike include a slowing economy, Brexit uncertainty and retreating inflation. So, despite Ben Broadbent’s stating, ‘We anticipate a couple more rate rises to get inflation back on track,’ markets are seemingly not pricing in more than two rate hikes. While several investors are expecting additional rate hikes to control the 3% year-on-year inflation figure, the high inflation number is mainly caused by a fall in value of the pound. The inflationary impact of a lower pound is transitory and will slowly dissipate in 2018. A better reasoning for more rate hikes should be derived from the tight labor market; the current unemployment rate is at the lowest level since 1975, which will drive future wage growth up.

Keith Knutsson of Integrale Advisors was rather skeptical of such an argument by stating, “while it is very well possible that wage growth picks up looking forward, it has been sluggish despite the shrinking unemployment numbers – real wage growth has actually decreased! What follows is a risk of the economy tilting downside.”

With fears of slowing growth hovering over the Bank of England, it seems unlikely that the rate hikes will occur as presented. An improper approach by the BoE could shift households and businesses towards panic.

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