'High chance' BoE will hike rates next week, says Capital Economics
By Michele Maatouk
Date: Thursday 28 Oct 2021
(Sharecast News) - There's a "high chance" the Bank of England will raise interest rates at next week's meeting, Capital Economics said on Thursday, adding that it will be "fast out of the blocks but won't go the distance".
It expects the Monetary Policy Committee to raise rates from 0.10% to 0.25% at the meeting on Thursday 4 November. It also reckons the Bank could raise rates to 0.50% in February, if not in December.
"But we think investors are wrong to price in interest rates rising to 1.25% by the end of next year," said chief UK economist Paul Dales.
He said there are reasons why the MPC may want to wait until December or February. By those meetings, it will have more information on how the end of the furlough scheme on 30 September influenced the labour market.
Dales noted that in the September minutes, the Bank said "there was a high option value in waiting for that additional information before deciding if and when a tightening in monetary policy might be warranted".
"Waiting to see how marked the recent slowdown in GDP growth has been and whether the latest rise in Covid-19 cases forces the government to reimpose some mild restrictions could also prove valuable," Dales said.
It would also be odd to tighten policy by hiking rates while still loosening policy by purchasing assets via quantitative easing, he said.
But there are also "compelling" reasons to think rates will be raised at the November meeting.
Dales said: "Since the MPC doesn't tend to surprise markets, if MPC members thought a rate hike in November was unlikely then we would have expected them to push back against investors' expectations by now.
"And to the extent that the MPC wants to raise interest rates to stop inflation expectations from rising further (which is the message that the Governor sent in his speech in late September), then it may make sense to do that sooner rather than later."
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