Could the Bank of England really hike rates by the end of the year?

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imageEconomy9 hours ago (Oct 11, 2021 09:51)

© Reuters.

By Samuel Indyk

Investing.com – Comments from Bank of England officials over the weekend have prompted money markets to price in a first interest rate hike by the Bank of England before the end of the year, a move that would have been unthinkable less than a month ago.

The CME’s BoEWatch tool is showing a greater than 47% chance of a rate hike by the end of the year, from a less than 8% chance a month ago. The tool uses MPC SONIA futures prices to gauge market expectations of the future path of Bank of England interest rates.

Bailey and Saunders comments

Over the weekend, comments from the Bank of England Governor Andrew Bailey and external Monetary Policy Committee (MPC) member Michael Saunders have added to expectations that policy might be tightened sooner than previously thought.

Speaking to the Yorkshire Post, Bailey said he was “concerned” about inflation being above the central bank’s target.

“Unfortunately, if you look at our last forecast, it [inflation] is going to go higher I am afraid,” Bailey told the regional newspaper. “As the Bank of England governor I would prefer it not be there.”

The Bank of England’s latest projections from August saw CPI inflation rising to around 4% in Q4 this year and Q1 next year but the Committee said they expected above-target inflation to be temporary and return to around the 2% target in the medium term.

Saunders was even more explicit on the need for interest rate hikes. The former Citigroup (NYSE:C) economist told the Telegraph that households should be prepared for “significantly earlier” rises in the interest rate.

Talking on rate hikes, Saunders said: “The February one is fully priced in and for December, it’s half priced in. I’m not trying to give a commentary on exactly which one, but I think it is appropriate that the markets have moved to pricing a significantly earlier path of tightening than they did previously.”

It is worth noting that Saunders is one of the more hawkish members on the rate-setting MPC and voted alongside Dave Ramsden to reduce the target stock of government bond purchases at the last meeting to £840 billion.

Could the Bank of England vote to raise rates this year?

The answer to this question may become clearer by the end of the week when two more members of the MPC are scheduled to have spoken publicly.

On Wednesday, Deputy Governor Jon Cunliffe is scheduled to be speaking, however, a speech that may be of greater interest will be that of Silvana Tenreyro on Thursday. Tenreyro is one of the more dovish members of the Bank of England but if she shows any concerns over rising inflation then it may signal that the central bank is serious about hiking interest rates by the end of the year.

Data

This week, the UK’s Office for National Statistics releases labour market data on Tuesday and monthly GDP figures on Wednesday. The labour market data will be closely watched in the coming months after the end of the government’s furlough scheme in September, which could see the addition of over 1 million workers to the labour force.

“As the BoE has pointed out, the demand/supply imbalance situation in labour market is particularly uncertain at present,” said Lloyds (LON:LLOY) Bank analysts in a note. “Just how it is resolved will be an important determinant of whether wage growth is likely to accelerate sufficiently to add to concerns about inflation.”

Could the Bank of England really hike rates by the end of the year?

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