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Bank of England: As a first interest-rate hike in more than a decade looms, here's what experts expect

Ben Chu, Josie Cox
If there is a hike, will it be a one-off or a sign of things to come?: AFP/Getty

For the first time in more than a decade, the Bank of England is widely expected to raise interest rates later on Thursday.

But whatever decision the Monetary Policy Committee makes, it’s unlikely to be an easy one.

Wage growth is stagnating, household budgets are tight and Brexit negotiations are casting a shadow over economic growth prospects.

So what would the implications of a rise be for financial markets, the pound, savers and those borrowing money? And might a hike be a one-off or a sign of things to come?

Here’s a look at what experts have to say.

Kacper Brzezniak, portfolio manager, Allianz Global Investors

“It has been more than 10 years – more than 3,750 days, in fact – since the Bank of England last raised interest rates. This drought has added to increased anticipation that the monetary policy committee will announce a hike at its 2 November meeting.

“To be sure, both wages and growth in the UK are continuing to disappoint, but inflation is running well above the BoE’s target – putting the bank under pressure to act. Yet although the markets are 85 per cent sure there will be a hike, we are not quite as convinced: we see around a 60 per cent chance.”

Kate Smith, head of pensions, Aegon

“While the case for raising rates is now well established, it comes at a time when UK households are still just about treading water. Even a small increase will mean that many families will have to tighten their belts to meet growing loan interest repayments, and do so with Christmas just around the corner.

“However, with close to 12.5 million pensioners living off their savings in the UK, an increase to interest rates couldn’t come soon enough. For the 12 million millennials potentially saving for a deposit on a house, the rate rise is a double-edged sword. They’ll earn more interest on their savings, but they will also see mortgage rates creep up, keeping a house purchase tantalisingly out of their grasp.”

Robert Wood, economist, Bank of America

“We see risks of a more hawkish message as market pricing of one hike a year seems inconsistent with the BoE’s urgency. For our part, we think this will be ‘one-and-done’ from the BoE even if they do not describe it that way.”

Mike Bell, Global Market Strategist, JPMorgan Asset Management

“BoE has led markets to expect a rate rise this week, with markets pricing in about an 85 per cent chance of a hike, up from about only 20 per cent at the start of September. With this in mind, market reaction should be relatively muted if a rate rise is delivered. That said, if the Bank of England gets cold feet and delays raising rates, sterling and gilt yields are likely to fall.

“If the Bank does raise rates, as expected, it is doing so against a weak growth backdrop, signs of weakness in the London housing market and a still hugely uncertain political outlook. Inflation is high predominantly because of the fall in sterling caused by the Brexit referendum result, not because of a strong domestic economy.

“The market only expects one additional rate rise next year, on top of the one this week, and is unlikely to price a more aggressive rate hiking cycle until there is more evidence that low unemployment is starting to feed through into an acceleration in wage growth, which may or may not materialise.”

Adam Chester, head of economics, Lloyds Bank Commercial Banking

“We believe the Bank’s inflation forecasts are likely to overshoot the two per cent target for the next two to three years, leaving the door open to at least one further interest-rate increase next year.”

Phil McHugh, senior market analyst, Currencies Direct

“The first UK rate hike in over a decade has been largely priced in to the value of the pound. If we do see a hike from 0.25 per cent to 0.5 per cent we are likely to see a small but limited follow through in [sterling] strength.

“The main impact of a hike would be a reduction in confidence for consumers and firms already rattled by ongoing Brexit uncertainties and an erosion of growth which is already tepid. Some have argued the economy is still too fragile to cope with increased borrowing costs.

“The direction of the pound longer-term will depend on whether this is a one-off hike as a corrective measure following the emergency rate cut post the Brexit vote or the start of a hiking cycle. It is more likely to be the former.

Kathleen Brooks, research director, CityIndex

“Although a hike cannot be guaranteed – Mark Carney is famously referred to as the unreliable boyfriend – it is highly likely that the Bank will hike rates otherwise its credibility could be on the line. The Bank has been preparing the markets for this hike for some time, so if they don’t pull the trigger it is likely to cause a wave of volatility in UK asset prices, and in the pound and gilt markets in particular.

“This does not mean that Thursday’s decision will be an easy one for the members of the MPC. They have a conflict of objectives, with compelling reasons to both hike rates and remain on hold.

“This is no easy decision for the Bank, especially the impact a rate hike could have on the budgets of variable rate mortgage holders. However, there is a solution that could make this pill easier to swallow. The Bank could swaddle this rate hike with a comforting message that there will be no prolonged rate hiking cycle, essentially the bank is ‘one and done’ when it comes to hiking rates.

“This could be reinforced in the markets if there are some dissenters on Thursday who vote to keep rates on hold. If there is only a slim majority in favour of hiking rates, then we could see the market push back expectations of a second rate rise until 2019.”

Laith Khalaf, senior analyst, Hargreaves Lansdown

“An interest-rate rise is a hollow victory for cash savers because it still won’t deliver a level of interest that keeps up with price rises. Tighter monetary policy will also take its time to filter through to cash savers because the banks will delay passing through higher rates to depositors for as long as possible.”

Neil Wilson, senior market analyst, ETX Capital

“There is a risk that the Bank pulls back from hiking altogether. There is a small but significant chance the MPC members get cold feet and decide that tightening now would be too soon. Wage growth is faltering, retail sales are starting to buckle and no deal has yet to be negotiated on Brexit.

“There is considerable pressure coming from some corners of the business community to avoid raising rates. The MPC members will certainly be listening and they will no doubt be aware of the history of central banks tightening too soon.”

Ipek Ozkardeskaya, senior market analyst, London Capital Group

“If the [Bank] opts for a dovish hike (one-off action and a dovish statement), the [sterling] bulls could be disappointed, take their profit and walk away. Therefore, a rate hike alone is not a done deal for the success of [sterling]-long positions this week.”