Britain is Drawing Nearer to a Rake Hike Environment

Last week, the global financial markets had a rude awakening suggesting that the Bank of England might soon be heading towards a decision to raise interest rates. Three policymakers in the Bank of England’s Monetary Policy Committee (MPC) voted to support an increase in Interest rates in June. The policymakers namely; Kristin Forbes, Ian McCafferty, and Michael Saunders voted to raise interest rates from 0.25% to 0.50%.

Of course, the vote was not enough to compel the Bank of England to raise rates because the MPC had eight members and the other 5 members didn’t vote to support the rate hike. Yet, the 5:3 vote is the closest that the Bank of England has come to raising interest rates since 2007; hence, we can reasonably conclude that policymakers are bullish about the prospects of UK’s economy.

A new Bank of England policymaker leaning towards a rate hike

Fresh news out of the market indicates that one of the economists that voted against the rate hike last week is leaning towards support an increase in interest rates next month. Andy Haldane, chief economist at Bank of England has said that he will vote to support an increase in interest rates soon enough. Stewart Howell an analyst at Lionexo observes that “the news caused the Pound Sterling to climb up 0.42% to $1.2684 to suggest that London is optimistic about what an increase in interest rates might mean for the economy.”

Mr. Haldane decided to support the rate hike in a speech nothing that “having weighed the evidence, I think that the balance of risks associated with tightening ‘too early’, on the one hand, and ‘too late’, on the other, has swung materially towards the latter in the past six to nine months.”

The rate hike is not yet a done deal

Based on the current state of things, we can expect the MPC to be spilt 4:4 when the rate hike decision comes up for a vote in August. If the rate hike vote is hung (as you can expect in a 4:4 vote) the Bank of England governor will have the deciding vote.

The MPC should have nine members but deputy governor Charlotte Hogg who resigned in the first quarter of the year is yet to be replaced. If her replacement is named before the August meeting, the MPC will have nine member and we might have a significant vote for or against the rate hike.

Nevertheless, it is also important to note that Kristin Forbes who is spearheading the charge for the rate hike will leave the Monetary Policy Committee at the end of this month. Silvana Tenreyro will be replacing Ms. Forbes in the MPC – London will expect Ms Tenreyro to vote in support of the rate hike but nothing is certain until she casts her vote.

Another factor that could derail the rate hike train is the possibility that Mr. Haldane might change his mind about supporting the increase in interest rates. In 2014, Mr. Haldane said he’ll support an increase in rates but he changed his mind later noting that the available economic data has become gloomier. Hence, we would to wait see what actually happens in the next four weeks before we know how the Bank of England is likely to act on Interest rates.