BoE to start countdown to next rate hike with forecast upgrade

London

The Bank of England will probably raise its economic growth forecasts next week, setting the scene for a potential interest-rate increase within months.

In a survey for Bloomberg, all but one of 17 economists see the BoE lifting its 2018 projection on Thursday, with the predictions for the next two years most likely to be left unchanged. The central bank will publish its new outlook alongside its latest policy decision and analysis on the supply side of the economy.

The benchmark rate will likely stay at 0.5 per cent next week after officials raised it for the first time in over a decade in November. But bets on the timing of the next hike have shifted recently, with a growing number now seeing the next move happening in May.

Officials said last year that the economy’s potential growth rate — and, by extension, its ability to expand without generating unwanted price pressures — had diminished, and tighter monetary policy would therefore be needed over the coming years. Since the BoE’s last projections, output and wage growth have both come in faster than expected.

Governor Mark Carney this week gave a relatively upbeat view of the economy and hinted at a forecast upgrade by the BoE, saying the International Monetary Fund’s 1.5 per cent projection for 2018 was a little low. The bank’s November forecast is already a little higher, at 1.6 per cent.

“We won’t exactly agree with the IMF forecast, I think it’s a little light for the economy for 2018,” he told an economics committee in the UK parliament on Tuesday.

A forecast upgrade, if accompanied by a view that spare capacity is fast being eroded, would paint a picture of an overheating economy requiring tighter monetary policy.

Nevertheless, Brexit remains a risk, and policymakers have stressed that the UK’s disentanglement from the European Union could ultimately result in policy being changed in either direction. While 41 per cent of economists in the survey say rates will go up in May, a sizeable 28 per cent see no move until 2019, the year the UK is due to formally quit the bloc.