Chart of the Week: Far From Certain that the Bank of England Will Hike in November

Last week, the UK Monetary Policy Committee struck a more hawkish tone, arguing that “some withdrawal of monetary stimulus [was] likely to be appropriate over the coming months”. As a statement of intent, we would not read much into this. Having struggled to rationalise the unexpected weakness in business investment and net trade in the second quarter, the Committee appears to be relying on consumer expenditure being firmer than forecast in order to justify the maintenance of its 0.3% GDP growth estimate for Q3. But data released last week confirmed our suspicion that the consumer squeeze intensified going into the third quarter. And with the key driver of the UK economy under assault, economic growth is likely to soften through the second half of this year, making it far from certain that the Bank will hike in November.

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This is not the first time that the MPC has cried wolf, repeatedly trying to persuade investors that they have failed to price in a sufficiently aggressive interest rate path, only to have a change of heart come the next meeting. Most memorably the guidance issued in August 2013 stated that “the MPC intends not to raise Bank Rate from its current level of 0.5% at least until the Labour Force Survey headline measure of the unemployment rate has fallen to a threshold of 7%.” Several quarters after that, the unemployment rate slipped decisively below that threshold. And yet, four years later, Bank Rate is lower than it was then.

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It was these mixed signals that led to Governor Mark Carney being dubbed the “unreliable boyfriend”, an association that he has yet to escape. In July 2015, Mr Carney declared that the decision to hike interest rates from record low levels would come into “sharper relief” around the turn of the year. Several months later, he went a step further, declaring that the Committee’s focus was on raising interest rates. Come the new year, however, a rate hike was ruled out. Soon after, the UK voted to leave the EU and Bank Rate was cut.

Despite this unpredictability, investors have now brought forward expectations on the timing of the first rate hike and sterling has rallied. Indeed, as our chart highlights, cable has climbed to its highest level since the immediate aftermath of the Brexit vote. But in our view, even if the Bank did hike in November, it would not be a step on the road to policy normalisation. Instead, it would mark little more than a reversal of the unnecessary, and quite probably ineffective, post-Brexit rate cut.

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