Mark Carney may be forced to hike interest rates sooner than initially forecast, an investment director has warned.
According to Ross Mould, investment director at AJ Bell, the Bank of England’s decision to raise interest rates to 0.5 per cent earlier this month, the first hike since the financial crisis, has signalled that rates might rise further and earlier than the anticipated fourth quarter 2018.
He said above-target inflation continuing at 3 per cent, the renewed strength in oil price, and the weakness in sterling were complicated factors that could pressurise Mr Carney, governor of the Bank of England, to retract his initial "gradual and limited" interest rate rise.
“Whether the MPC wants to quickly tighten policy remains to be seen, given lingering doubts over the UK’s economic momentum and the Bank of England’s widely-voiced concerns about the possible impact of Brexit come 2019", Mr Mould commented.
He explained that the Bank of England’s concerns over inflation amid the uncertainty of Brexit’s impact on the UK’s economic momentum could influence a strategy to strengthen sterling by raising interest rates more quickly than markets anticipate.
In doing so, Mr Mould contended this would “make sterling a more attractive proposition relative to say the dollar, yen, or euro”.
However, he said that approach would be heavily dependent on whether the climbing price of oil continues, as the rising movements of Brent crude appears to be contributing significantly to the rate of UK inflation.
Without a halt to the rally of oil rising above $60 a barrel within 12 months time, Mr Mould commented that Mr Carney would be unable to take comfort in the 3 per cent spike in inflation and subdued growth as only a temporary slump.
The effects of the devaluation of sterling, particularly on imported inflation in respect of food, are clear. Richard StoneMr Mould pointed out: "Riyadh, Moscow, Texas and Tehran are the key power brokers here, not Threadneedle Street, London."
He added this power dynamic indicated that, without any influence over such a climate, the Bank of England could be forced to “tighten monetary policy more than it would like to ahead of the Brexit deadline of March 2019 to nip any inflationary (or stagflationary) fears in the bud.”
Figures from the Office for National Statistics revealed that core inflation held at 3 per cent in October, rather than spiking slightly upwards as had been predicted.
For this reason, some experts believe policymakers should focus on growing the UK economy, especially in the light of Brexit, rather than focusing on whether interest rates will rise.
Richard Stone, chief executive of The Share Centre, said it was surprising that inflation held steady at 3 per cent in October, as many economists expected the effect of sterling’s devaluation following the EU Referendum to continue to come through in the figures and drive inflation higher.
He said: "The move by the Bank of England to raise interest rates last week (2 November) ensured that, had the governor had to write a letter to the Chancellor because inflation was above 3 per cent, then he would have been able to point to some action already being taken.
“The effects of the devaluation of sterling, particularly on imported inflation in respect of food, are clear. However, these were offset in part this month by a moderating of fuel prices, which meant transport costs were actually lower month on month when compared to September.
"Along with falls in furniture prices this helped keep the inflation rate at 3 per cent."
As a result, Mr Stone said the attention of chancellor Philip Hammond should be directed towards the “productivity challenge, the investment that is required in technology, education and training” as opposed to an imminent rise in rates.
Natasha Wren is an intern at FTAdviser
