Bank to hold rates but May hike could be on the cards

The Bank of England is expected to keep interest rates unchanged on Thursday, but speculation is mounting over another hike as soon as May after the economy's surprisingly strong end to 2017.

Experts predict the next rate rise might now come by the summer 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.

While Monetary Policy Committee (MPC) members are likely to hold rates at 0.5% on Thursday, it is thought rates could hit 0.75% in May with another increase due by the end of the year.

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

Financial markets suffered a brutal sell-off at the start of the week in response to fears that rising inflation could spark interest rate hikes across a number of economies.

The Bank and governor Mark Carney's comments will therefore be closely scrutinised on Thursday for clues as to the future path of rates.

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.

Mr 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 Brexit talks.

Policymakers may also temper rate expectations following more recent disappointing data from the main sectors of the economy, which point to a potential first quarter slowdown and cooling property market.

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."

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.

JP Morgan 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.

But there are also growing concerns that the Bank could stifle growth and the housing market if it raises rates too quickly.

Property prices have shown signs of being affected by the rate rise to 0.5% in November - the first in a decade - with mortgage costs rising noticeably.

Halifax figures this week revealed house prices fell 0.6% month on month in January after a 0.8% decrease in December.

Mr Wraith said that while he forecasts a rate rise in May, "we wouldn't recommend one".

Samuel Tombs, chief economist at Pantheon Macroeconomics, added that the Halifax data "highlights that the MPC can't raise rates quickly".

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