BoE: Still don’t expect a rate hike this year, despite signals - ING

James Smith, Economist at ING, suggests that the most interesting part of yesterday’s statement is the fact that the Bank still think investors are too cautious on the outlook for interest rates and that’s despite the UK swap curve steepening noticeably since Haldane & Carney’s hawkish comments in June.

Key Quotes

“However, with wage growth likely to stay below 2% for much of this year, and businesses likely to remain cautious on investment, we still think the Bank of England is unlikely to actually follow through with their hawkish signals and hike rates this year.”

“But what if they do hike? Well, we think it is much more likely that we enter a “one (or two) and done” scenario rather than the start of a more prolonged hiking cycle. For one thing, the MPC will want to tread very carefully given the rapid accumulation of household debt we’ve seen over the past few years.”

“The challenge for the Bank will be to communicate effectively this rate outlook to the markets, and they would most likely characterise a hike as simply removing the emergency stimulus put in last year. Whether markets interpret it this way is a different question.”