The Bank of England has had to navigate a difficult set of circumstances in its attempts to raise interest rates. As far back as 2014, Governor Mark Carney suggested that rate rises could come “sooner than markets currently expect,” only for those aspirations to be dashed. Indeed, the next move in interest rates turned out to be a rate cut, in the aftermath of the June 2016 Brexit vote. Then, after a carefully choreographed set of speeches indicating the time had finally come, interest rates were raised in November last year, with indications of more to come. The message was that the economy had sufficiently healed, as witnessed by the limited room for further falls in the unemployment rate and expectations of gently rising domestic capacity constraints – and, as a consequence, gently rising interest rates. The next rise in rates was anticipated to take place at the 10 May 2018 meeting of the Monetary Policy Committee.
Changing data, changing expectations
However, lower-than-expected UK CPI data and a weather-related slowdown in economic activity in March has called this into question, not least following Governor Carney’s latest interview, noting the weak data and that they have many meetings ahead to assess the economy.
Markets have reacted accordingly, reducing to around 50% the chance of a May policy rate hike and anticipating a cumulative hiking cycle of just 50 basis points (bps) from here. This all raises the question: Are we in for a repeat of 2014, when aspirations for hike rates get dashed by the data?