Interest rate decision could be with an eye to Brexit
The Bank of England’s Monetary Policy Committee is widely expected to announce a rise in interest rates at its meeting tomorrow.
With the possibility of interest rates set to move higher for only the second time in 10 years, markets are currently pricing in a 90% chance of a hike.
Markets last expected rates to rise as recently as May, only for the Bank of England to change its tune in the weeks leading up to the decision.
However, it would be regarded as a shock to markets if interest rates did not increase to 0.75%.
Alex Brandreth, deputy CIO at wealth management experts Brown Shipley, believes interest rate normalisation is long overdue, with the overall strength of the economy and its growth over the past five years suggesting that the UK could withstand higher interest rates, despite inflationary pressure.
He said: “In hindsight, the UK has actually been quite fortunate with the timing of Brexit, in the sense that it has coincided with the strongest period of global growth since the financial crisis and a world that has been the most synchronised it has ever been from a globalisation perspective.
“Going into 2016, the UK was one of the fastest growing economies in the developed world, but is now a laggard amongst these nations.
“Nonetheless, it is widely believed that the level of growth we are currently experiencing is strong enough to withstand higher interest rates, and this appears to also be the view of the Bank of England.”
While it is unlikely that the current economic cycle will see interest rates peak anywhere near the last highs we saw back in 2007 (5.75%), half that figure would be a more realistic expectation for markets, he believes.
Mr Brandreth added: “What is surprising however, is the timing of this interest rate decision given its proximity to Brexit negotiations.”
He believes there are two possible conclusions to be drawn from this.
“Either the Bank of England feels increasingly confident that we will achieve a positive outcome from ongoing negotiations and growth will remain strong as a result.
“Or, the Bank is looking to inject some ‘firepower’ into the economy if we do face a bad outcome and is giving itself the flexibility to stimulate the economy in the not-so distant future.”