Bank of England hints at earlier and faster rate rises

Bank of England hints at earlier and faster rate rises

John Wraith, a strategist at UBS alluded to this point in a note circulated to clients on Wednesday, saying that the possibility of a rate hike in May, the next time the bank releases an Inflation Report - meaning Governor Carney also holds a press conference - effectively hinges on progress in Brexit talks.

The comments were a sign that the bank was turning its sights to tackling price growth over two years rather than three.

Carney, in a letter to the British Chancellor, or finance minister, said: "Monetary policy would need to be tightened somewhat earlier and by a somewhat greater extent over the forecast period than anticipated at the time of the November report".

Interest rate futures now show a 60 percent chance of a BoE rate hike in June, and it is fully priced in for the August meeting, according to interest rate futures markets. In the sixth and the last monetary policy review of the financial year and the first post the Union Budget 2018 - 19, RBI Governor Dr. Urjit Patel has left interest rates, Statuary liquidity ratio (SLR) and Cash reserve ratio (CRR) unchanged.

The FTSE 100 had already been trading lower ahead of the Bank's interest rate decision and publication of the inflation report, as investors banked profits from yesterday's sharp recovery, after a late slump in trading in the USA yesterday sparked jitters the stock market sell-off may not be over.

"The Bank's views appear to be predicated on ongoing strength in the global economy fuelling better than expected growth and higher inflation in the UK. We see one interest rate hike to 1.25% during 2019, and another two interest rate hikes in 2020, taking interest rates up to 1.75% by the end of the year".

That was a lot weaker than its expectation of global growth of almost 4 percent over the same period and was also below the country's pre-financial crisis average of about 2.9 percent.

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But even with slower growth, Britain remained susceptible to excessive inflation.

The MPC minutes noted the possibility that booming global growth might give the United Kingdom a larger than expected boost and that domestic wages could pick up more rapidly than it now expects. On balance, CPI inflation is projected to fall back gradually over the forecast but remain above the 2% target in the second and third years of the MPC's central projection. The Committee will monitor closely the incoming evidence on the evolving economic outlook, and stands ready to respond to developments as they unfold to ensure a sustainable return of inflation to the 2% target.

Volatility has spiked across global stock markets after Monday's sharp falls in U.S. markets, with the Dow Jones registering its biggest one-day points fall in history.

Mark Carney said that "investment is being restrained by Brexit related uncertainty" in the UK.

Prime Minister Theresa May wants to clinch a transition deal next month to secure full access for Britain to European Union markets for about two years after it leaves the bloc in March 2019.

Some economists have said that the Bank of England has a narrow window to raise rates because later in the year, London and Brussels could be wrangling over their long-term relationship, weighing on the economy and possibly preventing the bank from moving.

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