UBS predict two near-term interest rate rises coming out of the Bank of England which goes against consensus expectations for an one-off rate rise in November.
The Bank of England’s September Monetary Policy Committee meeting has shaken market expectations for the future direction of UK interest rates, which have in turn fed a stronger British Pound on the currency markets.
The MPC said a near-term rate rise was seen as being acceptable to most members on the Committee while expectations were solidified in subsequent hours with confirmation of an imminent move on rates being provided in comments from Mark Carney and Gertjan Vlieghe.
Markets now believe an interest rate rise is due on November 2.
The move is expected to cancel out the ‘emergency’ 0.25% rate cut implemented in the wake of the EU referendum.
But, analysts at Swiss bank UBS have gone one step further and say a follow-up rate rise will be delivered in May, before the “door is shut” to further rises.
This is interesting - if correct we believe there is further upside for the Pound to be had as markets price in that second hike.
“Events last week lead us to conclude that only a more significant near-term deterioration in the data will now be enough to deflect them from raising rates in the near future,” says John Wraith, Strategist with UBS.
UBS say the MPC have no option but to raise rates in November as their credibility will be questioned if they fail to deliver.
It is noted the market has developed a tendency over the past year to shrug off gradually more upbeat and hawkish assessments by the MPC, and as recently as two weeks ago there was only one 25bp hike priced in over the next two years despite repeated warnings that rates were likely to rise more quickly than that.
“Having now made the most explicit commitment since 2011 to near-term policy tightening, the MPC will be aware that to further alter their position, absent a sharp worsening of the outlook, would potentially impact its ability to influence market expectations in the future,” says Wraith.
UBS forecast a 25bp rate hike in November and another in May 2018, taking Bank Rate to 0.75%.
But, beyond May, the prospect of further rate hikes are limited.
UBS say a handbrake will be pulled as the Bank considers an expected loss of economic momentum, in place since the start of 2017.
GDP slowing from an average of 0.6% q/q in the second-quarter of 2016 to 0.25% q/q in the first-half of 2017.
UBS believe the slowdown is set to persist throughout the two-year EU exit process.
In the second half of 2018 UBS believe the EU exit will be looming large enough to stay their hand as domestic demand is potentially hit harder.
For emphasis; the big news is that second hike coming in May. No explicit explanation is given as to why they believe the Bank will opt for this second move.