Bank of England set for first rate hike since November

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2 August 2018

thomasdodds

The Bank of England raised interest rates for only the second time since the financial crisis on Thursday afternoon, with policymakers in the UK voting to raise rates by 25 basis points to 0.75%, its highest level since March 2009.

W
hile the decision to raise rates was largely priced in by the market, the BoE delivered a hawkish surprise by unexpectedly voting unanimously for an immediate hike, after investors had eyed a 7-2 vote. The central bank noted that recent economic data had confirmed that the slowdown in the first quarter of the year was indeed temporary. Policymakers also stated that while the economy was growing more slowly than in the past ahead of Britain’s exit from the European Union, it was operating close to full capacity.

Sterling reacted to the hawkish surprise by rallying back above the 1.31 mark against the US Dollar, although with Brexit concerns continuing to dominate, investors were wary of pushing the Pound any higher. The BoE also continued to strike a cautious tone with regards to future hikes, which can be attributed to much of the muted reaction in Sterling. As was the case when the bank last tightened policy back in November 2017, rate-setters noted that an ‘ongoing tightening of monetary policy over the forecast period would be appropriate’, although would be ‘at a gradual pace and to a limited extent’.

The Bank of England is clearly in no rush to hike rates again any time soon, and will await further growth and inflation data before it considers whether additional policy changes would be warranted.

Federal Reserve holds rates, paves way for September hike

The Fed kept interest rates unchanged, as expected, last night. There were no real surprises in the statement either and the US Dollar was little moved off the back of the announcement. Policymakers slightly changed the wording on the economy, saying it was ‘strong’ rather than ‘solid’. All things considered, we think that the bank remains firmly on course to raise rates again in September, and then again in December.

Prior to yesterday evening’s Fed announcement, economic news out of the US was largely negative, although investors focused on the large jump in private sector job creation. The ADP employment change number increased back above the 200k mark for the first time since February in July, increasing to 219,000 from the previous month’s 181,000. This bodes well for Friday’s much more important nonfarm payrolls number, with investors eyeing a reading around the 190k level. In other news, the ISM manufacturing PMI missed expectations, while construction spending declined by 1.1%, its largest monthly drop in more than a year.

The Euro had little to trade off prior to last night’s Fed announcement, edging only modestly lower during London trading. The July manufacturing PMI out yesterday came in unchanged, with an upward revision to the French number offsetting downward revisions in Germany and Italy. Next up for the common currency will be tomorrow’s services PMI and retail sales figures.