Bank to hold rates amid speculation over May hike

The Bank of England is expected to keep interest rates on hold next week, but leave the door open to another hike as soon as May after the economy's surprisingly strong end to 2017.

Speculation has been mounting that the next rate rise might now come within months after official data showed the economy grew by a better-than-expected 0.5% at the end of 2017, up from 0.4% in the third quarter.

Despite warnings that there was likely still to be "slower and uneven" growth on the horizon, most experts have brought forward expectations for another rate increase to the second quarter.

Governor Mark Carney has already signalled that the rates outlook for interest rates will depend on Brexit negotiations (Frank Augstein/PA)
Governor Mark Carney has already signalled that the rates outlook for interest rates will depend on Brexit negotiations (Frank Augstein/PA)

While Monetary Policy Committee (MPC) members are seen voting unanimously to hold rates at 0.5% on Thursday, a raft of economists now believe the Bank will raise rates to 0.75% as early as May, following the first hike in a decade in November.

But the Bank's quarterly inflation report, which is due alongside the decision, is expected to stress that Brexit negotiations are key to the rates outlook.

Bank governor Mark Carney has already made this clear, telling the World Economic Forum in Davos last month that interest rates over the next year will depend crucially on the Brexit talks.

He said Britain's ability to secure a deal with the EU will determine the UK's ability to grow, as well as the strength of the pound, trade and inflation - and therefore the path of rates.

John Wraith, an economist at UBS, said: "The stronger-than-expected out-turn for fourth-quarter GDP (gross domestic product) and the better momentum the economy starts 2018 with as a result could give the MPC a window of opportunity to raise Bank Rate by the middle of the year.

"However, there are growing doubts about whether the UK and EU will agree on a transitional deal by the time of the EU Council Summit in late March, and failure to do so would in our opinion stay the MPC's hand as uncertainty intensifies and the economy slows more materially."

The so-called Super Thursday release of data from the Bank is likely to see it revise up growth forecasts, with JP Morgan pencilling in a rise from 1.6% to 1.9% in 2018 and a nudge up to 1.8% in 2019.

Allan Monks at JP Morgan said: "There are a bunch of growth positive factors that the MPC will need to respond to next week: the fiscal changes from the last Budget, the stronger global outlook, Brexit developments and most recently the upside surprise on fourth-quarter GDP."

He added the Bank is also set to revise up inflation forecasts for 2018 amid rising oil prices and higher domestic inflation, despite the Consumer Prices Index (CPI) easing back to 3% in December - the first fall since June.

Inflation projections are likely to be held for 2019 and lowered slightly in 2020.

But Mr Monks said: "Unless the BoE projects sub-2% inflation in 2020/21, it would open the door to a May hike."

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