The Bank of England's hardening rhetoric on inflationary pressures suggests its hand is being forced on a rapid upturn in rates, UBS has warned.
UBS Wealth Management economist Dean Turner said despite weak economic growth and inflation close to peaking, ‘the change in rhetoric from the Bank of England (BoE) in recent days leaves us in little doubt that they are keen to begin the process of normalising monetary policy.’
UBS upped its forecast to a 0.25% rise in November followed by a further 0.25% hike in May, reflecting a hardening consensus that BoE warnings on the path of rates are serious this time.
The BoE has repeatedly cautioned on rates but failed to follow through when setting borrowing costs, leading wags to describe governor Mark Carney as an 'unreliable boyfriend'.
Turner said the sharply hawkish tone to the minutes from the September meeting of the monetary policy committee (MPC) caught markets by surprise, however.
Turner said: ‘Our judgment remains that the outlook is for weak growth in the quarters ahead, as businesses are constrained by the uncertainty presented by Brexit, and consumers remain burdened by sluggish progress in real incomes.
Turner added that exchange rate inflation would begin to fade over the coming months however, having recent peaked at a five-year high of 2.9%.
He added that it’s unlikely the rate hikes will trigger a prolonged tightening cycle, with the ‘modest’ 50bps tightening ‘likely to give way to a period of pause and reflection as we enter the second half of 2018.’
Turner also said that UBS has been positive on the outlook for sterling throughout the year, with recent moves leaving the pound at levels close to its 12-month forecasts, but added that UBS expects further gains for the pound to be limited due to the weak economic growth and Brexit uncertainty.