The Bank of England is on track to raise interest rates twice over the next year, according to research by HSBC.
The central bank’s Monetary Policy Committee (MPC) is now expected to vote for a 25 basis point hike at its November meeting, and again in May 2018, HSBC’s UK economist Liz Martins said in a research note.
The move would effectively raise rates from record lows of 0.25% to 0.75% within a matter of months.
“Previously, we had expected no change in rates this year or next,” Ms Martins said.
The turnaround comes after minutes from the MPC’s September interest rate decision last week showed that all policymakers believed “some withdrawal of monetary stimulus was likely to be appropriate over the coming months”.
The MPC then raised the prospect of a potential rate rise in November, saying it would “undertake a full assessment of recent developments” at the time of its next quarterly inflation report.
“While our view on the UK economic outlook has not changed, the BoE’s messaging has: the MPC minutes for the first time alluded to the possibility of a rate rise ‘over the coming months’ in September,” HSBC said.
“The same phrase was then used by Mark Carney in an interview shortly after, and by Jan Vlieghe – a former dove on the committee – in his speech at the Society for Business Economists (SBE) a day later.”
Gertjan Vlieghe – external voting member of the MPC – was previously viewed as one of the Bank’s most dovish policymakers, but went on to say that he may back a hike “as early as the coming months”.
Mr Vlieghe has yet to cast a vote in favour of a hike, having fallen amongst the majority when the nine-strong MPC voted 7-2 to keep interest rates on hold at record lows of 0.25% last Thursday.
But in a subsequent speech, he said he was “struck” by a series of developments in the UK economy, including high inflation, employment growth, slight wage increases and stronger spending growth in the third quarter, as well as by a wider economic backdrop of “improving global growth”.
His comments sent the pound to 1.36 versus the US dollar, marking its highest level since the EU referendum result in June 2016.
Monetary Policy Committee member Gertjan Vlieghe has signalled his potential support for an interest rate hike (PA)
But despite investor excitement over the prospect of a pending interest rates hike, HSBC said the move could ultimately be “premature”, forcing the Bank to backtrack and cut rates once again.
“First, we are bearish on the demand side of the economy, given the continued import price squeeze on households and Brexit uncertainty headwinds weighing on investment,” the report by Ms Martins said.
“Second, we suspect the recent pick-up in wages could be fleeting.”
There is also further risk amid Brexit uncertainties, which could weigh on consumer and business sentiment “if negotiations go particularly badly”.
“We do not think two rate rises will crash the UK economy. But if we are right on wage growth and domestic inflation pressures, it might start to look as though tightening measures may have been a little premature,” HSBC said.
“We think that will prevent the MPC from raising rates more than twice and might even raise the possibility of a reversal whereby rates are cut again.”