The Bank of England could raise interest rates as soon as May if a transition deal is struck in Brexit negotiations, new analysis has suggested.
UBS analyst John Wraith suggested stronger than expected GDP growth in the fourth quarter of last year and an improved momentum in the first month of 2018 could lead members of the Bank’s monetary policy committee (MPC) to raise rates by 25 basis points by the middle of the year.
Such a hike would put the base rate at 0.75 per cent, its highest in almost nine years.
However, Wraith added that the scenario is “explicitly conditional” on a transitional deal being agreed by March at the latest.
The Bank last hiked interest rates at its November meeting, raising them from their historic low of 0.25 per cent to 0.5 per cent. But weak consumer confidence and low wage growth has caused economists to suggest the Bank should keep rates on hold for the foreseeable future. Last month, City A.M.’s shadow MPC unanimously voted to hold rates where they are.
But in his note today, Wraith gave a 50 per cent probability to a rate hike by May. However, he added:
We are sceptical that the smooth path effectively priced in thereafter will materialise, and believe any optimism from an early transitional deal could soon run into fresh doubt as the challenges relating to more permanent arrangements resurface.
Source: City A.M.