News | Question of the Week, WC 28th January
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Q: Can the BoE really hike with the U.S. Fed on hold?
A: Investors no longer expect any further increases in the U.S. Fed Funds Rate in 2019, whereas just three months ago, two hikes were priced in. Even if investors are right about the outlook for U.S. rates—we doubt they are—the U.K. won’t be constrained by the Fed’s inaction. Our chart below shows that the last two U.K. rate hike cycles commenced when the Fed was on hold. At present, U.K. interest rates are the furthest they have been below U.S. rates since 1984, even though the two economies’ labour markets look remarkably similar. Brexit uncertainty clearly is weighing on the U.K. economy at present, justifying the MPC’s current stance. But when that uncertainty lifts—we still expect MPs to sign off a deal by the end of March—the Committee likely will surprise investors by how quickly it moves to tighten policy. After all, fiscal stimulus and lower oil prices will boost the U.K. economy this year, while domestically-generated inflation still is rising. As a result, we expect the MPC to raise Bank Rate by 25bp every six months, once Brexit uncertainty has subsided, though our forecast for this cycle to start in May recently has become a closer call.
Samuel Tombs, Chief U.K. Economist
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Posted: 1st Feb 2019
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