Will UK interest rates rise next month?

Markets had been expecting rates to stay at 0.25% until next summer. Now the Bank of England is poised to act

10-11-2017
bank-of-england945x470

Authors

Azad Zangana
Senior European Economist and Strategist
See all articles

Here we go again … the Bank of England has dropped heavy hints on interest rates. It could order an increase next month, according to the latest market pricing.

Many are puzzled with the sudden change in communication given the fragile state of the economy and the uncertainty created by Brexit negotiations.

The Bank, of course, has form for raising expectations then failing to deliver. Long before the most recent sabre-rattling, it had earned the nickname "unreliable boyfriend". It received the label during a select committee grilling by Labour MP Pat McFadden in 2014.

The most recent swing in sentiment came after Gertjan Vlieghe, a dovish member of the MPC, suggested we were “approaching the moment when Bank Rate may need to rise”.

Markets had believed a rise from 0.25% to 0.5% was possible by June 2018. After the speech [on 15 September], this forecast moved forward to as early as next month.

The forecast for a rise to 0.75% also spun forward, moving from June 2020 to May 2018.

 

Interest-rate-forecast-10-Oct

*Implied path of interest rates derived from GBP OIS forwards curves. Source:
Bloomberg, Bank of England, Schroders Economics Group. 21 September 2017

In reaction, bond yields rose, and so did the pound.

With markets primed, will the Bank of England follow through with a rise?

There are enough caveats in the Bank’s recent hawkish statements that provide it an escape from a November hike.

The MPC will be acutely aware of a dramatic slowdown in the economy this year, and the reasons why. Businesses are investing less and households are struggling, squeezed by rising inflation.

The Bank is not pre-committed to raising rates in November, but it may feel forced to follow through. It has very little credibility left with markets, and a dovish turn would cause sterling to fall sharply.

However, inflicting rapid increases could shock households into saving more. It could trigger a recession.

Ideally, rate rises need to be gradual, limited and timed with an upswing in the economy, or at least confidence. The last part seems to be the bit that the Bank of England is missing.

 

Subscribe to our Insights

Visit our preference center, where you can choose which Schroders Insights you would like to receive

The views and opinions contained herein are those of Schroders’ investment teams and/or Economics Group, and do not necessarily represent Schroder Investment Management North America Inc.’s house views. These views are subject to change. This information is intended to be for information purposes only and it is not intended as promotional material in any respect.

Authors

Azad Zangana
Senior European Economist and Strategist
See all articles

Topics

UK
Azad Zangana
Interest rates
Contact Schroders
Follow us

Please consider a fund's investment objectives, risks, charges and expenses carefully before investing.

The website and the content included is intended for US-based financial intermediaries (and their non-US affiliates) on behalf of those of their clients who are both (a) not “US persons” as that term is defined in Rule 902 under the United States Securities Act of 1933, as amended (the “1933 Act”) and (b) “non-United States persons” as that terms is defined in Rule 4.7(a)(vi) under the Commodity Exchange Act of 1936, as amended. None of the funds described herein is registered as an “investment company” as that term is defined in the United States Investment Company Act of 1940, as amended, and shares of the funds described herein have not been and will not be registered under the 1933 Act or the securities laws of any of the states of the United States. The shares may not be offered, sold or delivered directly or indirectly in the United States or for the account or benefit of any “US person.”

The information contained in this website does not constitute an offer to purchase or sell, advertise, recommend, distribute or solicit a subscription for interests in investment products in any Latin American jurisdiction where such would be unauthorized. The information contained in this website is not intended for distribution to the public in general and must not be reproduced or distributed, entirely or partially to any individuals who are not allowed to receive it according to applicable legislation. The investment products and their distribution may not be registered in Latin America, and therefore may not meet certain requirements and procedures usually observed in public offerings of securities registered in the region, with which investors in the Latin America capital markets may be familiar. For this reason, the access of the investors to certain information regarding the investment products may be restricted. Financial intermediaries and Advisors must ensure the information provided in this website is appropriate and suitable to the receiver’s domicile and jurisdiction and according to the applicable legislation.

For illustrative purposes only and does not constitute a recommendation to invest in the above-mentioned security/sector/country.

Issued by Schroder Investment Management (Europe) S.A., 5 (“SIM Europe”), rue Höhenhof, L-1736 Senningerberg, Luxembourg. Registered No. B 37.799

Schroder Investment Management North America Inc. (“SIMNA”) is an SEC registered investment adviser, CRD Number 105820, providing asset management products and services to clients in the US and registered as a Portfolio Manager with the securities regulatory authorities in Canada.  Schroder Fund Advisors LLC (“SFA”) is a wholly-owned subsidiary of SIMNA Inc. and is registered as a limited purpose broker-dealer with FINRA and as an Exempt Market Dealer with the securities regulatory authorities in Canada.  SFA markets certain investment vehicles for which other Schroders entities are investment advisers.

Schroders Capital is the private markets investment division of Schroders plc.  Schroders Capital Management (US) Inc. (“Schroders Capital US”) is registered as an investment adviser with the US Securities and Exchange Commission (SEC).  It provides asset management products and services to clients in the United States and Canada.  For more information, visit www.schroderscapital.com

SIM (Europe), SIMNA, SFA and Schroders Capital are wholly owned subsidiaries of Schroders plc.

© Copyright 2023 Schroder Investment Management North America Inc