The pace and scale of future base rate rises is heavily dependent on the outcome of the UK’s negotiations to leave the European Union, according to the Bank of England’s inflation report.
The report accompanied the announcement by the central bank that its monetary policy committee (MPC) voted by a majority of seven to two to double the UK base rate from 0.25 per cent to 0.5 per cent.
In its quarterly inflation report the Bank of England stated it expects to make two further rate rises, between now and 2020, leaving rates at 1 per cent in 2020.
The central bank said its forecasts for the economy are based on the average of the range of possible outcomes for the UK from the Brexit negotiations.
Trevor Greetham, head of multi-asset investing at Royal London Asset Management, said it is “difficult to imagine” that interest rates would continue to rise in the event of a “no deal” outcome to the negotiations between the EU and the UK government.
In the report, the central bank said economic growth in the UK is likely to continue at a “modest” pace in the coming years with further gradual rate rises.
The Bank of England stated it expects inflation to be 2.4 per cent in 2018 and 2.2 per cent in 2019, both above the central bank’s target of 2 per cent, but below the current 3 per cent level.
Kathleen Brooks, head of research at Forex.com, said sterling has fallen because the Bank of England has been very cautious in its outlook for the economy and inflation.
She noted the forecasts from the central bank is for GDP growth of 1.6 per cent next year.
Ms Brooks said the market has been pricing one interest rate increase in 2018, but based on today’s commentary, “we will be lucky if we see that.”
Anthony Doyle, fixed income investment director at M&G, said the current climate of political uncertainty means it is “hard to justify” today’s (2 November) base rate increase.
He added that he doesn’t expect such a modest increase to have much impact on the economy.
Providers have already been rushing to launch products that perform better when rates are higher, with both Aberdeen Standard Investments and Vanguard launching short duration bond funds.
david.thorpe@ft.com
