United Kingdom central bank signals rate increase in case of Brexit deal

United Kingdom central bank signals rate increase in case of Brexit deal

Despite last year's rate rise, there are misconceptions as to when consumers will actually see the results, particularly as some banks are failing to pass this on.

The value of the pound initially jumped nearly 1% against the dollar, but fell back to about 0.5%.

"Although the MPC voted 9-0 this month in favour of holding interest rates, it has put the prospect of a May rise firmly on the table".

Bank of England Deputy Governor Ben Broadbent has spoken to calm fears after a volatile week on the stock markets - he played down the notion there were similarities with conditions before the 2008 global financial crisis. The main message today is that the key arguments underlying the Bank's decision to hike rates in November - expectations for stronger wage growth and higher, global demand-driven economic growth - are materialising, and in some cases, materialising faster'.

That we are now moving - albeit very slowly - to what is a more "normalised" interest rate environment is undeniably welcome.

Higher interest rates will come as a blow to mortgage payers who will see their monthly payments increase. The rate rise was the first increase in the rate since July 2007.

Policymakers continue to expect strong economic growth, with GDP forecasts for 2018 and 2019 clocking in at around 3.25% annually.

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"Were the economy to evolve broadly in line with the February inflation report projections, 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", the MPC said.

It also thinks that United Kingdom wage growth will start to pick-up, giving the economy a further boost. This scenario, however, will leave inflation above 2% in three years, which can be judged to increase interest rates with more than the expectations of investors.

"The Bank of England's Brexit-contingent hawkish signal today means meaningful sterling upside may be slightly tempered in the near-term", wrote ING currency strategist Viraj Patel in a note to clients.

It points out that the United Kingdom economic engine still "remains restrained by Brexit-related uncertainty" which is "the most significant influence on the economic outlook". However, this is below expectations for global growth of almost 4% over the same period.

Economists think it is likely that the next rate rise will come in May, but are not certain. Unemployment remains at historically low levels at just 4,3 percent, despite the fact that the British economy has slowed considerably. Prices have risen sharply due to the pound's plunge after the June 2016 vote for Brexit, which simultaneously pushed up import costs, notably of food and energy, and weighed on economic growth by reducing households' purchasing power.

But Governor Mark Carney and colleagues said they now wanted to return inflation to its 2% target over "a more conventional horizon".

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