Date: 21 Sep 2017
While, at the time of writing, no one can yet be precisely sure what British Prime Minister Theresa May will unveil in Florence on Friday, or the reaction to it, there seems a growing likelihood that the Bank of England (BOE) will raise rates sooner rather than later. Setting aside the fact that another failure to do so, having on a number of occasions spoken of the possibility of a hike only to row back later, might be damaging to its credibility with the market, a rise of 25 basis points in interest rates would anyway only be a reversal of the cut made after the Brexit vote in 2016, a cut made at the time to treat concerns that the referendum result might trigger a dramatic UK economic slowdown. The BOE might well argue their action helped stave off such an outcome, but that doesn’t mean keeping the base rate at just 0.25 per cent still remains justified. Indeed, one Monetary Policy Committee member, Gertan Vlieghe, who has previously been conspicuously dovish on UK interest rates, felt able to argue on September 15 that if the data trends “of reducing slack, rising pay pressure, strengthening household spending and robust global growth continue, the appropriate time for a rise in Bank Rate might be as early as in the coming months.”
Sell side analysts have recently been pencilling in the possibility that a rate hike might be coming as early as November and sterling (GBPUSD, GBPJPY, EURGBP) has responded accordingly, catching a bid as the currency market, which has been carrying a structural short position, has recalibrated. As this Wednesday’s Fed decisions will have been well digested by then and the BOE may have greater clarity on ECB intentions on October 26, traders might think November makes sense. As for Vlieghe, the data also may be supporting his line. Wednesday’s UK retail sales figures for August revealed a sharp 1.0 per cent month-on-month, the biggest rise since April and well above consensus forecasts for sales growth of 0.2 per cent. July data was revised up. Traders will have their own views on sterling’s continued direction of travel, and will also be conscious that Brexit negotiations remain a risk factor in the equation, but perhaps from a domestic data perspective, the broad tone of recent UK economic data arguably supports the BOE reversing its post-Brexit rate cut and restoring the base rate to 0.5 per cent.
Written by Neal Kimberley, External Currency Analyst.