Britain has kept interest rates at a record low of 0.5% since March 2009 and the date of the first rate hike in years has kept everyone guessing.
Economist Robert Wood, and his team at Bank of America Merrill Lynch, said that the UK is poised to not only raise rates by November 2016, but the Bank of England is also probably going hike rates three times in 2017:
Unless the data turn up dramatically in the next couple of months, we think the hurdles to a May hike are too high now. So we expect the BoE to hike rates for the first time since the financial crisis in November 2016 rather than in May.
We stick with three hikes in 2017. A potential shift in BoE strategy to lower for longer would mean, if our relatively optimistic outlook turns out to be right, faster subsequent hikes. But we assume deployment of macroprudential policy tools could take a little of the pressure off rate hikes.
Low interest rates have stimulated the economy by lowering the cost of borrowing. In other words, it has helped those in debt to make repayments and boosts the amount of money in people’s pockets.
Many economists predict that the BoE will raise rates in late 2016.
After all, Britain is more or less at full employment — the economic term for where everyone who can get a job in a functioning economy has one — at 5.2% and its economic growth rate is one of the strongest in Europe.
This is because Britain’s wage growth is still poor. More people are working but wages are not growing as fast as people taking up employment.
A small rate rise right now could therefore really impact homeowners, those servicing debt, and even, in real terms, impact the cost of food and energy bills. If interest rates rise, wages have to be seen as keeping up with those increases.
Right now, that’s not happening but BAML is predicting that the BoE will bite the bullet do the first of the gradual increases by the end of the year.
“We also justify changing our BoE call partially by appealing to a shift in BoE strategy, rather than a shift in the economic outlook: the unemployment rate, for instance, continues to surprise the BoE on the downside. So in our view the later the BoE starts hiking the faster it would need to tighten policy,” said Wood and his team.
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