Bank of England set to announce first interest rate hike since 2007

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2 November 2017

Matthew Ryan

Senior Market Analyst at Ebury. Providing expert currency analysis so small and mid-sized businesses can effectively navigate international markets.

The Bank of England is widely expected to raise interest rates in the UK for the first time in over ten years this afternoon as it grapples with high inflation and an economy that has fared much better-than-expected since last year’s Brexit vote.

e were among the very small minority of analysts that had called for a Bank of England interest rate hike earlier in the year. However, with the market now pricing in more than a 90% chance of a rate increase at today’s meeting, the Pound is likely to take its cue from the bank’s communications rather than the rate decision itself. Investors will be paying particular attention as to whether today’s announcement will mark a ‘one-and-done’ hike, or start the process of policy normalisation and a gradual period of rising rates.

We think that Governor Mark Carney will be reluctant to vocalise the need for just one hike, followed by a prolonged period of stable rates, for risk of causing a sharp sell-off in the Pound. The voting pattern among the committee could also give as a good indication as to the likelihood of further rate increases in the coming months. Given recent caution voiced by a number of rate-setters, we are expecting a 6-3 majority vote in favour of rates, with members Cunliffe, Ramsden and Tenreyro voting to hold.

A 7-2, 8-1 or even unanimous vote would be seen as a significant positive for Sterling, should it be accompanied by rhetoric that would suggest additional hikes next year are possible. Contrastingly, the lack of a hike at Thursday’s meeting would be a significant disappointment and we’d expect to see a sharp sell-off in the Pound against every major currency.

The bank’s rate decision, meeting minutes and quarterly Inflation Report will be released at midday, followed by Carney’s accompanying press conference at 12:30 UK time.

Federal Reserve signals December US interest rate hike

In a busy week of central bank announcements, yesterday we had the latest meeting of the Federal Reserve which, as expected, kept rates unchanged. The Dollar was actually little changed after the meeting, despite the statement pointing to another hike in December. Policymakers see economic activity rising at a solid rate despite the recent hurricanes, while claiming that the US labour market would continue to strengthen. We think these comments guarantee another hike next month and markets seem to be in agreement, pricing in around a 90% chance of a hike.

Ahead of Friday’s nonfarm payrolls report we had an encouraging sign that the US labour market recovered last month following September’s hurricane induced slowdown. The latest ADP employment change number, showing the jobs created in the private sector, rose to an above forecast 235,000 from the 110,00 a month previous. Elsewhere, growth in the manufacturing sector of the US economy slowed in October according to ISM. The monthly index slipped to 58.7 from 60.8.

The Euro was little moved after last night’s Fed announcement. With European markets closed due to All Saints Day, economic announcements were at a premium. In the absence of any market moving news whatsoever, investors will turn their attention to this morning’s manufacturing PMI.