City economists divided on interest rate path as Bank of England official adds to November hike talk

The City is divided over the future path of interest rates set by the Bank of England, as one of its leading policymakers gave another clear sign that an interest rate hike could come in November.

Ian McCafferty, an external member of the Bank’s rate-setting monetary policy committee (MPC), reiterated his view that economic conditions are “already sufficient to justify a modest reduction in monetary stimulus”.

McCafferty, an advocate of raising bank rate since June, said his MPC colleagues had been “waiting for further evidence” before voting for an increase, but added he thought their “earlier fears of the risks of a sharper slowdown have diminished”, in a speech delivered today in London.

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McCafferty also added the Bank should only consider unwinding the massive pile of assets amassed under quantitative easing “some time” after bank rate has risen “several times”.

The Bank of England surprised some economists in the City at its last meeting in September by saying raising rates would be appropriate “in the coming months”.

Talked into a corner

That has set off speculation about the future path of rate increases, with economists at US bank Morgan Stanley today saying they expect the Bank to raise interest rates by 0.25 per cent twice in the coming year, with a May 2018 hike following one on 2 November.

Most City economists believe a November move is highly likely, with a serious dent to the Bank’s credibility if they do not follow through.

“They’ve almost talked themselves into a corner,” said Nina Skero, head of macroeconomics at the Centre for Economics and Business Research.

However, there is considerable variation in views on what the Bank should and will do over the coming year.

Skero said: “Even if there is a rate rise I don’t think it’s the start of a string” of hikes, owing to weak growth forecasts.

Different speeds

Brian Hilliard, chief UK economist at Societe Generale, said the speed of further interest rate rises “is likely to be very slow”, particularly given the risk of further uncertainty around the Brexit process.

Weak earnings growth and slow process on moving to trade negotiations with the EU are key factors which could see “reality intervene” in the Bank’s efforts to raise interest rates back to normal levels.

However, Ruth Gregory, UK economist at Capital Economics, expects a much more aggressive path of monetary tightening, with “a further three hikes next year” after a pause until May.

“The MPC has given itself a pretty low hurdle for raising interest rates, “ Gregory said, although added the prospect of future hikes will be heavily data dependent.

Credibility

The Bank’s hiking pace will be gradual, even if they signal a desire for further hikes, according to Kallum Pickering, senior UK economist at Berenberg bank. He said: “I think the Bank of England is inclined to go early and slowly rather than going late and much faster.”

Two hikes in 2018 would allow the Bank to “build a little more credibility” with markets, he added, but anything more would likely be too much in the face of mediocre growth.

Simon French, chief economist at Panmure Gordon, said talk of a series of hikes may be overdone in the absence of evidence of wage inflation, although political motivations make a November rise more likely.

“They will want to get the monkey off their back of last August,” he said, referring to the last interest rate move, a 0.25 per cent cut in the immediate aftermath of the Brexit vote in 2016. The Bank has steadfastly stuck by its move to stimulate the economy, saying it helped save hundreds of thousands of jobs, but it has faced significant criticism as growth has stayed relatively steady.

The Bank is faced by “the most disputed next move that I can remember” in recent times, French added.

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