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Second rate hike in decade? You need to read this.

Second rate hike in decade? You need to read this.

Today’s market commentary is a UK special edition. At 12:30 BST, we’ll be watching the Bank of England’s Governor Mark Carney speaking, and word in the markets is that he may announce an interest rate hike – the second of its kind in a decade!


The background noise has been ramping up, and evidence from the Futures Market shows investors are betting there’s a 90% chance of UK interest rates being raised to 0.75%, a 0.25% hike, at lunchtime today. With the spectre of Brexit looming large and the UK economy lagging behind its peers, is it time for the second rate increase since the financial crisis?


Bank of England Governor Mark Carney and his colleagues on the Monetary Policy Committee could hardly be accused of being hasty, so could they hold fire on an interest rate increase this week?


Only in May, policy makers indicated a preference for a few rate hikes in 3 years to keep inflation in check; if the economy performs as expected. Recent data has shown that growth has picked up after a disappointing first-quarter slowdown, and the economy is on track to hit the Bank of England’s growth forecast of 0.4% for Q2.


Arctic conditions hammered retail sales in Q1, but sales have bounced back as the weather has improved, employment is growing and the jobless rate has dropped to the lowest level since the 1970s, circa 4%. Oil prices have risen and the Pound is back near a 10-month low, both of which will feed into higher inflation.


Inflation and consumer prices are currently growing at 2.4%, comfortably above the BoE’s 2% target, but can it last? Economist forecasts are indicating it could drift back to the 2% target by Q1 next year, negating the need for a rate hike. It appears the weaker Pound effect on inflation is slowing.


And then there’s the theory that rates need to go up before the next economic downturn to provide room for interest rate cuts when they’re next needed. Experiments with negative rates in Japan and the EU have been less than conclusive.


We’ve heard the warnings from the Bank of England and beyond, that ultra-low interest rates are dangerous and could be encouraging us to live beyond our means. Andrew Sentance, economist and former BoE rate-setter, highlighted a report showing 2017 UK spending was above incomes for the first time in three decades. Cheap borrowing can encourage poor personal finance decisions, and if adopted en masse, it is dangerous for the economy.


March 2019 is the current date for Brexit and we’re still not entirely clear what it means. Holding off hiking rates could be prudent in the event of a hard or disorderly Brexit. Mark Carney stated recently that having no deal in place could trigger a “financial stability event” on both sides of The Channel and the BoE has been preparing contingency measures.


The UK and Italy look likely to receive the wooden spoon for the slowest growth of any EU countries this year.  Some economists argue that growth isn’t robust enough to weather a rate hike. However, the BOE argues that the supply capacity of the economy has withered; meaning domestic inflation will be triggered by weaker rates of expansion.


The global trade environment has deteriorated this year, with the US introducing tariffs on Chinese and EU goods. A global trade war has implications for both global and domestic growth and inflation. Enough for some to favour holding rates.


Economists at major banks have highlighted that the Brexit uncertainty raises the possibility that any rate hike now may need to be reversed in November. The ECB jumped the gun in 2011 when it raised rates just as the European economy slid into recession.


There’s no shortage of arguments on either side and expectation is great; which can only feed into market volatility.

Data to watch


09:30    GBP PMI Construction (Jul)

12:00    GBP BoE Interest Rate Decision

12:00    GBP BoE Asset Purchase Facility

12:00    GBP Monetary Policy Summary

12:00    GBP Bank of England Quarterly Inflation

12:00    GBP BOE MPC Vote Unchanged

12:00    GBP BOE MPC Vote Cut

12:00    GBP BOE MPC Vote Hike

12:00    GBP Bank of England Minutes

12:30    GBP BOE’s Governor Carney speech

13:30    USD Initial Jobless Claims (Jul 27)

13:30    USD Continuing Jobless Claims (Jul 20)

15:00    USD Factory Orders (MoM) (Jun)

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