Home Breaking News Why the Bank of England might not raise interest rates

Why the Bank of England might not raise interest rates

by LLB Editor
2nd Nov 21 9:57 am

Markets are pricing in an interest rate rise on Thursday but they may be disappointed as the MPC has good reasons to wait.

Investors wait to adjudge the impact of interest rate rises on funds and markets.

Laith Khalaf, head of investment analysis at AJ Bell, comments: “The market is convinced the Bank of England is going to raise interest rates this week, but the interest committee might want to take a deep breath and count to ten before pushing the rate hike button. There are some compelling reasons why the Bank might wait before tightening policy, and it was only six weeks ago that the Monetary Policy Committee voted unanimously to keep interest rates on hold, so a shift to tighter policy would be a sharp U-turn indeed.

“The Bank’s judgement that inflation is transitory hasn’t really been tested, as it’s only six months that CPI has been marginally above target, and in fact the inflation index fell back at the last reading. The data is notoriously unreliable at the moment, thanks to the distortions created by the pandemic, and a synchronised emergence from it in Europe and America.

“The energy crunch has deepened since the committee last met, but is still relatively short-lived, and gas prices have actually been falling in recent days as more supply looks to be coming online from Russia. In any case, an interest rate rise in the UK isn’t going to make a blind bit of difference to the global price of oil and gas, though it will heap a bit more pressure on UK consumers at a time when many will be facing higher costs to heat their homes and travel to work. Larger mortgage payments would be an unwelcome extra burden for many UK homeowners. Rising energy costs themselves act as a brake on consumer and business activity, and the Bank may well decide that pouring more cold water on the situation at this juncture could lead to an economic freeze.

“While the cloudy economic data might stay the Bank’s hand this week, an interest rate rise is very much in the post. A rate hike isn’t suddenly going to mean money is expensive to borrow, and 0.25% would still be an incredulously low rate, even below the ‘emergency’ rate of 0.5% introduced in the wake of the financial crisis.

“A sustained tightening cycle would represent a paradigm shift in markets, however. We’ve only had two interest rate rises in the last fourteen years, and we estimate around 10 million Britons have never seen base rate above 1% in their adult lives, based on ONS data. Markets have already begun to price in the end of the era of cheap money, and investors would be prudent to review their portfolios for potential casualties of tighter monetary policy. Interest rates are still likely to stay low by historical standards for a long time, but market prices may well adjust more rapidly.”

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